**UNITED STATES****SECURITIESAND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

**Form 10-K**

 

| **ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|--------------------------------------------------------------------------------------------|
|                                                                                       |
| **For the fiscal year  ended December 31, 2003**                                           |
|                                                                                       |
| **Commission File No.****1-12248**                                                         |
|                                                                                       |
| **KAISER GROUP HOLDINGS, INC.**                                                            |
| **(successor issuer to Kaiser Group International, Inc.)**                                 |
| (Exact name of registrant as specified in  its charter)                                    |
|                                                                                       |
| **Delaware**                                                                               |
| (State or other jurisdiction of  incorporation or organization)                            |
|                                                                                       |
| **54-2014870**                                                                             |
| (I.R.S. Employer  Identification No.)                                                      |
|                                                                                       |
| **12303 Airport Way, Suite 125, Broomfield,  Colorado**                                    |   | **80021-0007** |
|                                                                                       | (Address of principal executive offices) |   | (Zip Code) |
|                                                                                            |  |  |  |

 

**Registrant’stelephone number including area code: (720) 889-2770**

 

Name of each exchange on whichregistered:

**None**

 

Securitiesregistered pursuant to Section 12(b) of the Act:

**None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

**Common Stock,par value $0.01 per share**

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  ý

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2).  Yes o No ý

 

Theaggregate market value of the voting and non-voting common equity held bynon-affiliates, based on the closing sales price of the Common Stock on theOver-the-Counter Bulletin Board on June 30, 2003, was $19,447,566.40.  For purposes of this computation, all officers,directors, and 5 percent beneficial owners of the registrant (as indicated inItem 12) are deemed to be affiliates. Such determination should not be deemed an admission that suchdirectors, officers, or 5 percent beneficial owners are, in fact, affiliates ofthe registrant.

 

**APPLICABLE ONLY TOREGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:**

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Section 12, 13 or 15(d) of the Securities Exchange Actof 1934 subsequent to the distribution of securities under a plan confirmed bya court.  Yes ý No o

 

The Planof Reorganization of Kaiser Group International, Inc. under Chapter 11 of theBankruptcy Code became effective on December 18, 2000.  The Plan provides, among other things, thatholders of shares of common stock of Kaiser Group International, Inc. receivedshares of common stock of Kaiser Group Holdings, Inc. and that holders ofspecified outstanding debt obligations and other specified claimants receivedcash and shares of preferred stock and common stock of Kaiser Group Holdings,Inc., all in accordance with the terms set forth in the Plan. The initialdistribution of securities occurred as of April 17, 2001.

 

As ofMarch 26, 2004, there were 1,594,270 shares of Common Stock outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portionsof the Registrant’s definitive proxy statement to be prepared in connectionwith the Annual Meeting of Shareholders to be held May 5, 2004 are incorporatedby reference into Part III of this Annual Report on Form 10-K.

 

 

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**TABLE OF CONTENTS**

 

 
| **PART I**   |
|--------------|
|         |   |   |
| Item 1.      | Business |   |
| Item 2.      | Properties |   |
| Item 3.      | Legal Proceedings |   |
| Item 4.      | Submission of Matters to a Vote of Security  Holders |   |
| Item 4A.     | Executive Officers of the Company |   |
|         |   |   |
| **PART II**  |
|         |   |   |
| Item 5.      | Market for Registrant’s Common Equity and  Related Stockholder Matters |   |
| Item 6.      | Selected Consolidated Financial Data |   |
| Item 7.      | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
| Item 7A.     | Quantitative and Qualitative Information  about Market Risk |   |
| Item 8.      | Financial Statements and Supplementary Data |   |
| Item 9.      | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosures |   |
| Item 9A.     | Controls and Procedures |   |
|         |   |   |
| **PART III** |
|         |   |   |
| Item  10.    | Directors  and Executive Officers of the Registrant |   |
| Item  11.    | Executive  Compensation |   |
| Item  12.    | Security  Ownership of Certain Beneficial Owners and Management |   |
| Item  13.    | Certain  Relationships and Related Transactions |   |
| Item  14.    | Principal  Accounting Fees and Services |   |
|         |   |   |
| **PART IV**  |
|         |   |   |
| Item  15.    | Exhibits,  Financial Statement Schedules and Reports on Form 8-K |   |
|         |   |   |
|         | Signatures |   |

 

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**PART I**

 

**Item1****.                    Business**

 

**CorporateHistory; Overview**

 

KaiserGroup Holdings, Inc. is a Delaware holding company formed on December 6, 2000for the purpose of owning all of the outstanding stock of Kaiser GroupInternational, Inc.  Kaiser GroupInternational, Inc. continues to own the stock of its remainingsubsidiaries.  On June 9, 2000, KaiserGroup International, Inc. and 38 of its domestic subsidiaries voluntarily filedfor protection under Chapter 11 of the United States Bankruptcy Code in theDistrict of Delaware (case nos. 00-2263 to 00-2301). Kaiser GroupInternational, Inc. emerged from bankruptcy with a confirmed Plan ofReorganization (the Second Amended Plan of Reorganization (the Plan)) that waseffective on December 18, 2000.  In thisdocument, we frequently use the terms “we” and “Kaiser” to refer to KaiserGroup Holdings, Inc., Kaiser Group International, Inc. and other subsidiarieswe own.

 

Under thePlan, Kaiser Group International, Inc. sold some of its businesses and madepayments of cash and stock to various classes of creditors described in Note 2to the Consolidated Financial Statements. We now have only a limited number of activities, assets and liabilities,primarily consisting of the following:

 

•                  We ownKaiser-Hill Company, LLC equally with CH2M Hill Companies Ltd.  Kaiser-Hill is our major source ofincome.  Kaiser-Hill currently serves asthe general contractor at the U.S. Department of Energy’s Rocky FlatsEnvironmental Technology Site, a former Department of Energy nuclear weaponsproduction facility near Denver, Colorado. Kaiser-Hill has performed for the Department of Energy at this sitesince 1995 and in January 2000 was awarded a new contract to manage the closureof the site.  The level of successexperienced by Kaiser-Hill in achieving timely closure of the Rocky Flats site,and the cost of achieving such closure, are the primary determinants of ourlong-term financial performance following the completion of the reorganizationprocess.  See “Kaiser-Hill” below foradditional information on Kaiser-Hill.

•                  We have a substantial claim, pending resolution,against the owner of a steel mini-mill that we constructed for Nova Hut, s.a.in the Czech Republic.  The engineeringand construction of the mini-mill was completed in 2000 by a subsidiary ofKaiser Group International, Inc. called Kaiser Netherlands, B.V.  See “Nova Hut” below for additionalinformation on the Nova Hut project.

•                  Until September 30, 2002 we held a minorityownership interest in ICF Consulting Group, Inc. (a division that Kaiser GroupInternational, Inc. sold in 1999).  Wecontinue to hold an 81⁄2% subordinated promissory note from ICF Consulting dueJune 25, 2006 in the principal amount of $6.4 million as a result of that transaction.

•                  We have a wholly-owned captive insurance companythat is not at this time issuing new policies and is solely involved inresolving remaining claims made against previously issued policies.

•                  We have an ongoing obligation to fund a cappedpost-employment medical benefit plan for a fixed group of retirees.

 

**GeneralTerms and Distribution Status of Plan of Reorganization**

 

The effectiveness of the Planas of December 18, 2000 did not in and of itself complete the bankruptcyprocess.  The process of resolving inexcess of $500 million of claims initially filed in the bankruptcy isongoing.  By far the largest class ofclaims (Class 4) was made up of creditor claims other than trade creditor andequity claims. Class 4 claims included holders of Kaiser Group International,Inc.’s senior subordinated notes due 2003 (Old Subordinated Notes). Holders ofallowed Class 4 claims received a combination of cash and our preferred (NewPreferred) and common stock (New Common) in respect of their claims. Suchholders received one share of New Preferred and one share of New Common foreach $100 of claims. However, the number of shares of New Preferred issued wasreduced by one share for each $55.00 of cash received by the holder of anallowed Class 4 claim.

 

Pursuant to the terms ofthe Plan, we were required to complete our initial bankruptcy distributionwithin 120 days of the effective date of the Plan.  Accordingly, on April 17, 2001, we effected our initialdistribution of cash, New Preferred and New Common to holders of Class 4 claimsallowed by the Bankruptcy Court.  Atthat time, there were approximately $136.8 million of allowed Class 4claims.  The amount of unresolved claimsremaining at April 17, 2001 was approximately $130.5 million.

 

To address the remainingunresolved claims, the Bankruptcy Court issued an order on March 27, 2001establishing an Alternative Dispute Resolution (ADR) procedure whereby theremaining claimants and we produce limited supporting data relative to theirrespective positions and engage in initial negotiation efforts in an attempt toreach an agreed claim

 

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determination.  If necessary, the parties were thereafterrequired to participate in a non-binding mediation before a mediatorpre-selected by the Bankruptcy Court. All unresolved claims as of March 27, 2001 became subject to the ADRprocess. Since April 17, 2001, the date of the initial distribution, $123.0million of asserted claims have been withdrawn, negotiated or mediated to anagreed amount, resulting in cash payments approximating $2.2 million andissuances of 683 shares of New Preferred and 823 shares of New Common. As ofMarch 26, 2004, the amount of unresolved claims was approximately $7.5 million.We expect to resolve the remaining claims in the first six months of 2004 andcurrently believe that the total amount of Class 4 claims ultimately to beallowed in the Old Kaiser bankruptcy proceeding will not exceed $142.5million.  As demonstrated by the claimsettlements completed since April 17, 2001, and based on the belief that it isin the Company’s and its shareholders’ best interest, we have been settlingcertain remaining Class 4 claims entirely for cash payments in lieu of thecombination of cash and New Preferred and New Common as contemplated in thePlan.  We intend to continue to use thissettlement alternative during its resolution of remaining Class 4 claims.

 

From time to time in thefuture, as remaining unresolved claims are resolved, excess cash from the“reserve” fund (including cash added to “reserve” fund in payment of pro formadividends, classified as interest expense subsequent to July 1, 2003, onretained shares of New Preferred) must be used to redeem outstanding shares ofNew Preferred.  In January 2003, weredeemed 282,000 shares of outstanding New Preferred by using $8.9 million and$5.2 million of restricted and unrestricted cash, respectively.  In October 2003, we redeemed 113,530 sharesof outstanding New Preferred by using $1.6 million and $4.6 million ofrestricted and unrestricted cash, respectively.    In February 2004, weredeemed 95,932 shares of New Preferred by using $3.2 million of restrictedcash and $2.1 million of unrestricted cash.

 

**Kaiser-Hill**

 

Our major remaining asset and primary source of incomeis our 50% ownership interest in Kaiser-Hill Company, LLC, which we ownequally with CH2M Hill Companies Ltd. Kaiser-Hill was formed solely for the performance of the current andformer Rocky Flats contracts.  CH2M Hill designates three of the fivemembers of Kaiser-Hill’s Board of Managers, and we designate two members.

 

Kaiser-Hillcurrently serves as the general contractor at the U.S. Department of Energy’sRocky Flats Environmental Technology Site near Denver, Colorado. Kaiser-Hillhas performed since 1995 at this site, a former Department of Energy nuclearweapons production facility. Kaiser-Hill is working to safely stabilize, package and ship radioactivematerials, remediate facilities contaminated with hazardous and radioactive waste,and restore much of the 6,000-acre site to its natural state for future use asa national wildlife refuge.  The levelof success experienced by Kaiser-Hill in achieving timely closure of the RockyFlats site, and the cost of achieving such closure, are the primarydeterminants of our long-term financial performance.

 

EffectiveFebruary 1, 2000, Kaiser-Hill was awarded a new contract pursuant to whichKaiser-Hill provides services that will complete the restoration of the RockyFlats site and close it to Department of Energy occupation.  The economic terms of the contract providethat Kaiser-Hill will earn revenue equal to the actual cost of completing theproject plus a performance fee based on a combination of factors involving theactual cost of completing the site closure project and the actual date ofcompleting the project.

 

On March24, 2004 Kaiser-Hill received a contract modification that motivates safecontinuing positive performance by increasing the maximum fee ceiling that maybe earned under the Closure Contract. The same contract modification reduces the minimum fee floor andincludes other provisions related to work scope changes.  The potential fee to be earned pursuant tothe Closure Contract as recently modified ranges from $75.0 million to $560.0million based on Kaiser-Hill’s costs to complete the site closure being withinthe range of completion costs of $3.12 billion and $4.86 billion, andcompletion at various dates between 2005 and 2007.  For project costs saved below a target level, Kaiser-Hill retainsa varying percentage share ranging from 20% to 30% as additional incentivefee.  Similarly, for project costsincurred above a target level, Kaiser-Hill’s incentive fee is reduced by a 30%share.  Kaiser-Hill recently received acontract modification that motivates safe continuing positive performance byincreasing the maximum fee ceiling that may be earned under the contract.  The same contract modification reduces theminimum fee floor and includes other provisions related to work scopechanges.  See Item 7. - “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” forfurther discussion of this activity.

 

**Nova Hut**

 

Although Old Kaiser soldits Metals, Mining and Industry business unit in August 2000, it retained itsNetherlands subsidiary, Kaiser Netherlands, B.V., which had been responsiblefor a turnkey engineering and construction services contract for theconstruction of a steel mini-mill in the Czech Republic for Nova Hut.  After construction of the mini-mill wascomplete in 2000, the contract with Nova Hut provided for a maximum of threepossible performance tests. The first performance test was

 

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completed on November 13,2000. Kaiser Netherlands believes that the first performance test wassuccessful and that Nova Hut should have agreed to final acceptance of themini-mill and made final payment of amounts accrued by Kaiser Netherlandsthroughout the project, including fee and retention amounts with release ofperformance guarantee instruments.  NovaHut, however, asserted that the first test was not successful. KaiserNetherlands believes that such contention may have been put forth in responseto severe financial constraints on Nova Hut’s operations resulting fromweakening conditions in the worldwide steel market and the significant amountsthat Kaiser Netherlands believed it was contractually due. To date, thisdispute has not been resolved, and Kaiser Netherlands has resorted to legalproceedings to enforce its rights.  Theprimary legal venue up until this time has been the Delaware bankruptcyproceeding for Old Kaiser, where the Company has asserted claims against NovaHut and the International Finance Corporation (“IFC”).  The Delaware bankruptcy court has previouslyruled that the Company, as opposed to Kaiser Netherlands, could proceed withprosecution of its specific claims against Nova Hut and IFC in the Delawarebankruptcy court venue.  Both Nova Hutand IFC appealed this ruling and during the first quarter 2004, the Delawarebankruptcy court’s decision regarding the IFC was overturned by the DistrictCourt, ruling that the IFC enjoys sovereign immunity from prosecution.  Kaiser Holdings has filed a notice of appealto the Third Circuit regarding this decision in favor of the IFC.  At this date, the Nova Hut appeal is stillpending at the District Court level.

 

In December 2003, theInternational Chamber of Commerce (“ICC”), under the dispute resolutionprovisions of the Nova Hut mini-mill subcontract between Kaiser Netherlands andthe mini-mill’s main equipment supplier, Tippins, Inc., issued a final awardthat was on balance favorable to Kaiser Netherlands.  As a result of the ruling, Kaiser Netherlands was relieved of theobligation to pay additional retention to Tippins and Kaiser Netherlands wasawarded a net cash settlement of $2.6 million. The Company has not recorded this settlement due to the uncertaintiesregarding collectibility.  However, theCompany intends to vigorously pursue collection of this settlement.

 

In January 2004, KaiserNetherlands filed arbitration claims against Nova Hut in excess of $40.0million with the ICC.  The arbitrationpanel is currently being constituted, and the first hearing should take placeduring the second or third quarter of 2004 with the earliest possible finalaward ruling being issued sometime in 2005. Nova Hut has submitted a $46.0 million counterclaim against KaiserNetherlands in these same ICC proceedings.

 

The continued litigation ofthese disputes, as well as the cost of a possible ongoing presence in Ostrava,Czech Republic, has had and will continue to have a negative impact on the cashflow of Kaiser Netherlands and Kaiser Holdings.

 

Based onthe Company’s continued concern over Nova Hut’s financial difficulties and thelack of a settlement resulting from an earlier, bankruptcy court-sponsoredmediation, in the fourth quarter of 2003 the Company further reduced thecarrying value of the remaining Nova Hut project assets from $6.0 million to$3.0 million by recording an additional reserve of $3.0 million, net of a $1.1million income tax benefit, through a charge to “Loss from DiscontinuedOperations”.  This reserve is inaddition to a reserve recorded in 2001, which reduced the carrying value of theNova Hut project assets from $21.6 million to $6.0 million by recording areserve of approximately $9.8 million, net of a $5.8 millionincome tax benefit, through a chargeto “Loss from Discontinued Operations”. These adjustments to the project asset carrying value have been determinedbased on the Company’s estimate of Nova Hut’s current ability to pay suchliability.

 

**Other Retained Assets, Activities and Obligations**

** **

UntilSeptember 30, 2002, we owned a 10% interestin ICF Consulting Group, Inc., a privately held entity, that was retained byKaiser Group International, Inc. when it sold its Consulting Group in June1999.  In September 2002 we consummateda settlement of outstanding disputes with ICF Consulting.  As a result of that transaction, we continueto hold an 81⁄2% subordinated note from ICF Consulting due June 25, 2006 in theprincipal amount of $6.4 million, net of a $0.5 million reserve foruncollectibility.

 

We own acaptive insurance company that is not at this time engaged in issuing newpolicies but is solely engaged in the process of resolving existingclaims.  Restrictions on the insurancecompany’s cash balances, maintained to support statutory insurance reserves,will be released as reserve requirements decrease in the future and to theextent such cash balances are not used in payment of resolved claims.

 

We alsohave the obligation to pay certain medical, disability and life insurancebenefits to a fixed group of retirees for life.  Such plans cover certain individuals who retired prior to 1993.  There are approximately 653 retirees anddependents currently covered by the plans, the average age of whom isapproximately 80.  The actuariallydetermined present value of this obligation as of December 31, 2003, based onthe existing commitments, interest rate assumptions and related medical benefitinsurance policies, was $7.5 million, net of an unrecognized actuarial loss of$0.6 million.  Although we intend toattempt to reduce remaining exposures relative to the costs of this obligationin the future, there can be no guarantee that this will be feasible, nor can weestimate the amount of potential future savings with any reasonable degree ofaccuracy.

 

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Ourassets also include those subsidiaries that were not debtors in the KaiserGroup International, Inc.’s bankruptcy proceedings.  However, many of those subsidiaries are foreign entities and,except for Kaiser Netherlands which performed services for the Nova Hut projectand those subsidiaries related to Kaiser-Hill, subsidiaries that were notdebtors in Kaiser Group International, Inc.’s bankruptcy proceedings do nothave material value.  It is anticipatedthat a number of such subsidiaries will be dissolved or otherwise cease toexist or become totally inactive.

 

Our Boardof Directors will consider whether we will engage in any additional businessactivities in the future.  Among otherthings, it is anticipated that the Board of Directors will consider whether weshould attempt to take advantage of the successful history of Kaiser GroupInternational, Inc. in the government services market, either independently andthrough Kaiser-Hill or affiliates, in order to develop a new revenue base.

 

**Insurance**

** **

We have arisk management and insurance program in place that provides a range ofcoverages tailored to the needs of the reorganized company.  Insurance coverages include policies forfiduciary, crime, directors and officers liability, property, generalliability, workers’ comp, and professional liability “runoff” coverage to dealwith liabilities arising from past activities and projects, if necessary.

 

Webelieve that the insurance coverages we maintain, including self-insurance,protect against risks that are comparable to those of similar businesses of ourscope and present operating profile and that related coverage amounts areeconomically reasonable. At this time, we expect to continue to be able toobtain insurance in amounts generally available to firms with a similarprofile.  Insurance costs are rising,and there can be no assurance that the insurance coverage and levels maintainedby us will continue to be reasonably available.  An insured claim, or uninsured claim for that matter, arising outof pre-reorganization or post-reorganization activities of Kaiser Group International,Inc., if successful and of sufficient magnitude, could have a material adverseeffect on our financial position.

 

**Government Regulation**

** **

We may,from time to time, either individually or in conjunction with other governmentcontractors operating in similar types of businesses, be involved in U.S.government investigations for alleged violations of procurement or otherfederal laws and regulations.  Nocharges presently are known to have been filed against Kaiser GroupInternational, Inc. or our other subsidiaries by these agencies.

 

**Employees**

** **

As ofMarch 26, 2004, we had approximately 11 part-time employees.

 

**Company Website Information**

 

Wecurrently do not maintain a website.

 

### **Item2.                    Properties**

 

We owned no properties at December31, 2003, and leased properties at that date were located at 12303 Airport Way,Broomfield, Colorado, 80021-0007 and 9302 Lee Highway, Fairfax, Virginia22031-1207.

 

### **Item 3.                    Legal Proceedings**

 

On June9, 2000, Kaiser Group International, Inc. and 38 of its wholly ownedsubsidiaries filed petitions for relief under Chapter 11 of the U.S. BankruptcyCode with the U.S. Bankruptcy Court for the District of Delaware in order tofacilitate the restructuring of Kaiser Group International Inc.’s long-termdebt, trade and other obligations. Kaiser Group International, Inc. continuedto operate as a debtor-in-possession subject to the Bankruptcy Court’ssupervision and orders until its Plan of Reorganization was confirmed onDecember 5, 2000 and became effective on December 18, 2000. The provisions ofsuch Plan are further described under Item 1 of this Report, in Note 2 to theConsolidated Financial Statements, and in a Current Report on Form 8-K filedwith the Securities and Exchange Commission on December 14, 2000 by KaiserGroup International, Inc.

 

In the course of normalbusiness activities, various claims or charges have been asserted andlitigation commenced against Kaiser Group International, Inc. arising from orrelated to properties, injuries to persons, and breaches of contract, as wellas

 

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claims related toacquisitions and dispositions. Such claims are now part of the overallbankruptcy proceeding. Claimed amounts may not bear any reasonable relationshipto the merits of the claim or to a final court award. In the opinion ofmanagement, an adequate reserve has been provided for final judgments, if any,in excess of insurance coverage, that might be rendered against Kaiser GroupInternational, Inc. in the event of unsuccessful bankruptcy resolution. Thecontinued adequacy of reserves is reviewed periodically as progress on suchmatters ensues.

 

### **Item 4.                    Submissionof Matters to a Vote of Security Holders**

### ** **

No matterwas submitted to a vote to security holders during the fourth quarter of 2003.

 

**Item 4A.                 ExecutiveOfficers of the Company**

 

John T.Grigsby Jr., 64, is President and Chief Executive Officer and serves on theBoard of Managers of Kaiser-Hill.  Mr.Grigsby is also the President of John Grigsby and Associates, Inc., a firmwhich he founded in June 1984 to provide consulting assistance to financiallydistressed and reorganizing companies. Mr. Grigsby has served as the Trustee for the Transcom Creditors’ Trustand has served as chief executive officer of a number of financially distressedcompanies, including Super Shops, Inc., Auto Parts Club, Reddi Brake, Rose AutoStores-Florida, Inc. as well as for a number of Chapter 11 debtors, includingPro Set, Inc., Lomas Financial Corporation and Thomson McKinnon Securities,Inc.  Mr. Grigsby is also a member ofthe Board of Directors of First Southern Bancorp of Boca Raton, Florida.

 

Marijo L.Ahlgrimm, 43, is Executive Vice President and Chief Financial Officer. Prior tobecoming Executive Vice President and Chief Financial Officer upon theeffectiveness of Old Kaiser’s Plan, Ms. Ahlgrimm served as Senior VicePresident and Corporate Controller of the predecessor Kaiser entities sinceDecember, 1997. From 1993 to 1997, Ms. Ahlgrimm was Vice President andController of an information technology service provider that was subsequentlyacquired by TRW in December, 1997. Ms. Ahlgrimm was a manager withPricewaterhouseCoopers LLP from 1985 to 1993. Ms. Ahlgrimm graduated from theUniversity of Wisconsin-Madison (B.B.A.). Ms. Ahlgrimm is also the Chief Financial/Administrative Officer of aprivately held information technology provider located in Rockville, Maryland.

 

**PART II**

 

**Item 5.**                    **Market forRegistrant’s Common Equity and Related Stockholder Matters**

 

**MarketInformation**

 

Effective with implementationof Kaiser’s Plan of Reorganization, on or about April 17, 2001 each 96 sharesof Old Common were exchanged for 1 share of New Common.  New Common currently trades on theOver-the-Counter Bulletin Board system under the symbol “KGHI”.  The Over-the-Counter Bulletin Boardquotations reflect inter-dealer prices, without retail mark-up, mark-down orcommission and may not necessarily represent actual transactions.  At March26, 2004, there were 134 shareholders of record of the New Common.

 

Thefollowing table sets forth the high and low sale prices for the New Common asreported on the Over-the-Counter Bulletin Board.

 

 

|                    |   | **2003** |   | **2002** |   |
|-------------------------|--------|----------|--------|----------|--------|
|                    |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
| Year Ended December 31, |   |     |   |     |   |   |   |   |   |
| First Quarter           |   | $        | 8.00   |     | $      | 4.70 |   | $ | 3.00 |   | $ | 2.20 |   |
| Second Quarter          |   | 13.00    |   | 6.10     |   | 4.75 |   | 2.80 |   |
| Third Quarter           |   | 21.50    |   | 12.20    |   | 4.25 |   | 3.10 |   |
| Fourth Quarter          |   | 22.80    |   | 15.00    |   | 5.50 |   | 2.00 |   |
|                         |        |          |        |          |        |  |  |  |  |  |  |  |  |

 

OurTransfer Agent and Registrar is EquiServe Trust Company, N.A, P.O. Box 43069,Providence, RI 02940-3069.  TheShareholder Relations telephone number is (781) 575-2723, the hearing impairednumbers are (800) 952-9245 and (781) 575-2692 for callers outside of the UnitedStates, and the internet address is http://www.equiserve.com.

 

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KaiserGroup International, Inc. never paid cash dividends on its Old Common.  We anticipate that no cash dividends will bepaid on the New Common for the foreseeable future and that our earnings will beretained for use in the business and, consistent with the terms of the NewPreferred and the KGP put rights described in Note 8 to the ConsolidatedFinancial Statements, be used to pay dividends on and redeem outstanding sharesof New Preferred.  Our Board ofDirectors determines our dividend policy based on its results of operations,required payment of dividends on New Preferred, financial condition, capitalrequirements, and other circumstances.

 

**Securities Authorized for Issuance UnderEquity Compensation Plans**

 

Thefollowing table sets forth information as of December 31, 2003 with respect tocompensation plans under which equity securities of the Company are authorizedfor issuance:

 

 
| **Plan  Category**                                      |   | **(I)****Number of  securities to be  issued upon exercise   of outstanding  options and  warrants** |   | **(II)****Weighted-  average  exercise price  of outstanding  options and  warrants** |   | **(III)****Number of securities   remaining available   for future issuance  under plans** |   |
|---------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------|--------|
| Equity compensation plans  approved by shareholders     |   | —                                                                                               |   | —                                                                                |   | 150,000                                                                                    |   |
| Equity compensation plans not  approved by shareholders |   | —                                                                                               |   | —                                                                                |   | —                                                                                     |   |
| Total                                                   |   | —                                                                                               |   | —                                                                                |   | 150,000                                                                                    |   |

 

**Recent Sales of Unregistered Securities**

 

On April 17, 2001, wemade a distribution of cash, New Preferred and New Common to holders of Class 4claims allowed by the Bankruptcy Court. Holders of Class 4 claims received one share of New Preferred and oneshare of New Common for each $100 of claims. However, the number of shares of New Preferred issued was reduced by oneshare for each $55.00 of cash received by the holder of an allowed Class 4claim.  On April 17, 2001, we issued anaggregate of 1,136,024 shares of New Preferred and 1,368,632 shares of NewCommon to the holders of allowed Class 4 claims. On March 13, 2002, we issued683 shares of New Preferred to KE Realty Service, Inc. in connection with thesettlement of its Class 4 claim.  Theseissuances were exempt from registration under Section 1145 of the U.S.Bankruptcy Code.

 

In January 2003, weissued shares of New Common to the following directors as part of their compensationfor service as officers and Board of Directors:  John T. Grigsby, Jr. (1,000 shares), James J. Maiwurm (1,000shares), Jon B. Bennett (1,000 shares), and Frank E. Williams, Jr. (1,000shares).  These issuances were exemptfor registration under Section 4(2) of the Securities Act of 1933.

 

### **Item 6.                    SelectedConsolidated Financial Data**

### ** **

Selected consolidatedfinancial data of Kaiser Group Holdings, Inc. for the years ended December 31,2003, 2002 and 2001 and of Kaiser Group International, Inc. for the years endedDecember 31, 2000 and 1999, have been derived from our and/or Kaiser GroupInternational, Inc.’s audited consolidated financial statements. Thisinformation should be read in conjunction with the Consolidated FinancialStatements and the related notes thereto appearing elsewhere in this Report and“Management’s Discussion and Analysis of Financial Condition and Results ofOperations”. Certain reclassifications have been made to the prior periodfinancial statements to conform to the presentation used in the December 31,2003 Consolidated Financial Statements.

 

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**Selected ConsolidatedFinancial Data**

**(in thousands, exceptper share data)**

 
|                                                                                                                                                                    |   | **Successor Company** |   | **Predecessor Company** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|--------|-------------------------|--------|
|                                                                                                                                                                    |   | **2003**              |   | **2002**                |   | **2001** |   | **2000** |   | **1999** |   |
| Statement of Operations Data:                                                                                                                                           |   |                  |   |                    |   |   |   |   |   |   |   |
| Gross revenue                                                                                                                                                           |   | $                     | — |                    | $      | — |   | $ | — |   | $ | 271,385 |   | $ | 643,044 |   |
| Service revenue                                                                                                                                                         |   | —                |   | —                  |   | — |   | 76,018 |   | 186,856 |   |
| Operating loss                                                                                                                                                          |   | (4,918                | )      | (7,028                  | )      | (10,792 | ) | (224 | ) | (16,544 | ) |
| Income (loss) from continuing  operations before reorganization items, income taxes, minority interest,  extraordinary items and cumulative effect of accounting change |   | 11,028                |   | 29,165                  |   | 7,657 |   | (1,736 | ) | (35,260 | ) |
| Income (loss) before  extraordinary items and cumulative effect of accounting change                                                                                    |   | 4,368                 |   | 18,343                  |   | (4,957 | ) | 29,762 |   | (5,324 | ) |
|                                                                                                                                                                    |   |                  |   |                    |   |   |   |   |   |   |   |
| Basic and Diluted Earnings per  share:                                                                                                                                  |   |                  |   |                    |   |   |   |   |   |   |   |
| Continuing operations before  extraordinary items and cumulative effect of accounting change                                                                            |   | $                     | 2.92   |                    | $      | 8.60 |   | $ | 1.92 |   | $ | 1.74 |   | $ | (1.65 | ) |
| Discontinued operations, net of  tax                                                                                                                                    |   | (1.14                 | )      | 0.31                    |   | (9.11 | ) | (0.46 | ) | 1.42 |   |
| Extraordinary items, net of tax                                                                                                                                         |   | —                |   | —                  |   | — |   | 5.35 |   | (0.02 | ) |
|                                                                                                                                                                    |   |                  |   |                    |   |   |   |   |   |   |   |
| Total                                                                                                                                                                   |   | $                     | 1.78   |                    | $      | 8.91 |   | $ | (7.19 | ) | $ | 6.63 |   | $ | (0.25 | ) |
|                                                                                                                                                                    |   |                  |   |                    |   |   |   |   |   |   |   |
| Weighted average common shares  outstanding:                                                                                                                            |   |                  |   |                    |   |   |   |   |   |   |   |
| –basic                                                                                                                                                             |   | 1,594                 |   | 1,590                   |   | 1,119 |   | 23,255 |   | 23,823 |   |
| –diluted                                                                                                                                                           |   | 1,594                 |   | 1,590                   |   | 1,119 |   | 23,255 |   | 23,823 |   |

 

 
|                                       |   | **Successor Company** |   | **Predecessor  Company** |   |
|--------------------------------------------|--------|-----------------------|--------|--------------------------|--------|
|                                       |   | **2003**              |   | **2002**                 |   | **2001** |   | **2000** |   | **1999** |   |
| Balance Sheet Data (end of  period):       |   |                  |   |                     |   |   |   |   |   |   |   |
| Total assets                               |   | $                     | 73,900 |                     | $      | 96,195 |   | $ | 80,891 |   | $ | 106,168 |   | $ | 253,563 |   |
| Working capital                            |   | 3,343                 |   | 22,048                   |   | 23,974 |   | 54,131 |   | 17,116 |   |
| Long-term liabilities*                     |   | 35,175                |   | —                   |   | — |   | — |   | 131,795 |   |
| Mandatorily Redeemable preferred  stock ** |   | —                |   | 55,942                   |   | 62,481 |   | — |   | — |   |
| Shareholders’ equity (deficit)        |   | 20,077                |   | 17,805                   |   | 3,360 |   | 87,500 |   | (69,903 | ) |
|                                            |        |                       |        |                          |        |  |  |  |  |  |  |  |  |  |  |  |

 

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* Afterthe adoption of FAS 150 on July 1, 2003, we reclassified mandatorily redeemablepreferred stock from mezzanine equity to long term liabilities.  At December 31, 2003, long term liabilitiesconsist entirely of mandatorily redeemable preferred stock.

 

** Afterthe adoption of FAS 150 (see Note 3 to the Consolidated Financial Statements),we reclassified mandatorily redeemable preferred stock to long term liabilitiesfrom mezzanine equity.  Additionally, aswe did not complete the initial bankruptcy distribution until April 17, 2001,no shares of New Preferred were actually outstanding as December 31, 2000.

 

We adopted fresh startreporting in our consolidated balance sheet as of December 31, 2000. TheAmerican Institute of Certified Public Accountants’ Statement of Position 90-7,“Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”(SOP 90-7), requires that, under certain circumstances resulting from abankruptcy, a new entity be created for financial reporting purposes upon theemergence of that entity from bankruptcy. Accordingly, the value of the reorganized enterprise becomes theestablished amount for the emerging balance of shareholders’ equity, and anyaccumulated deficit of the predecessor entity is offset against availablepaid-in-capital to result in emerging retained earnings of zero.  Additionally, assets and liabilities wererecorded at their fair values.

 

Since the financial informationas of and subsequent to December 31, 2000 has been prepared as if it is of anew reporting entity and is not comparable to that of previous years, a blackline has been used to separate new entity information from prior entityinformation.  Financial information withregard to activity occurring prior to December 31, 2000 has been marked as“Predecessor”, and financial information with regard to activity as of December31, 2000 and thereafter is marked herein as “Successor”.

 

The value of the emergedenterprise used for fresh start reporting as of December 31, 2000 was $87.5million and was determined by management with the assistance of independentadvisors. The methodology employed involvedestimation of enterprise value taking into consideration a discounted cash flowanalysis.  The discounted cash flowanalysis was based on a seven-year cash flow projection prepared by management,taking into consideration the terminal value of its assets and liabilities asof immediately prior to its emergence from bankruptcy on December 18, 2000.Terminal values of assets and

 

7

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liabilitieswere determined based either on contracted amounts, actuarial present valuesand/or management’s estimates of the outcome of certain operating activities.These post-emergent matters consist largely of the retained operationsdiscussed in this Report. Net after-tax cash flows, assuming a 40% effectivetax rate, were discounted at approximately 17% in order to take intoconsideration the risks and uncertainties inherent in such projections. Thecash flow projections were based on estimates and assumptions aboutcircumstances and events that have not yet taken place. Estimates andassumptions regarding individual retained matters that form the collectivecomposition of the overall enterprise value as of December 18, 2000 areinherently subject to significant economic and competitive uncertainties andcontingencies beyond the control of the Company. Accordingly, there may bedifferences between projections and actual results because events andcircumstances frequently do not occur as expected and may be significant. Morespecifically, assumptions within the valuation related to the amount and timingof the ultimate performance and related cash flows of Kaiser-Hill have thegreatest impact to the overall enterprise valuation.

 

**Item 7.                    Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

** **

***Overview***

** **

**In thethree years since the Plan of Reorganization of Kaiser Group International,Inc. under Chapter 11 of the Bankruptcy Code became effective on December 18,2000, we have consummated the initial bankruptcy distributions to allowedclaimholders, continued to progress in resolving remaining outstandingbankruptcy claims, managed our remaining assets, wound down unnecessaryelements of previous activities and corporate structure, and redeemed asignificant portion of the number of New Preferred shares outstanding.**

** **

Followingthe effectiveness of the Plan, we have only a limited number of activities,assets and liabilities, primarily consisting of the following:

 

•                  We ownKaiser-Hill Company, LLC equally with CH2M Hill Companies Ltd.  Kaiser-Hill is our major source of income.  Kaiser-Hill currently serves as the generalcontractor at the U.S. Department of Energy’s Rocky Flats EnvironmentalTechnology Site, a former Department of Energy nuclear weapons productionfacility near Denver, Colorado.  Thelevel of success experienced by Kaiser-Hill in achieving timely closure of theRocky Flats site, and the cost of achieving such closure, are the primarydeterminants of our long-term financial performance following the completion ofthe reorganization process.

•                  We have a substantial claim, pending resolution,against the owner of a steel mini-mill constructed for Nova Hut, s.a. in theCzech Republic.  The engineering andconstruction of the mini-mill was completed in 2000 by a subsidiary of KaiserGroup International, Inc. called Kaiser Netherlands, B.V.

•                  Until September 30, 2002 we held a minorityownership interest in ICF Consulting Group, Inc. (a division that Kaiser GroupInternational, Inc. sold in 1999).  Wecontinue to hold an 81⁄2% subordinated promissory note from ICF Consulting dueJune 25, 2006 in the principal amount of $6.4 million as a result of thattransaction.

•                  We have a wholly-owned captive insurance companythat is not at this time issuing new policies and is solely involved inresolving remaining claims made against previously issued policies.

•                  We have an ongoing obligation to fund a cappedpost-employment medical benefit plan for a fixed group of retirees.

 

*Critical Accounting Policies and SignificantEstimates*

 

**Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires that we make estimates and assumptions affectingthe assets and liabilities (including contingent assets and liabilities)reported at the date of the Consolidated Financial Statements and the incomestatement amounts reported for the periods presented.  We base our estimates on historical experience and on variousother assumptions that we believe to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions or conditions.**

** **

Our accounting measurementsthat are most affected by our estimates of future events are:

 

•                  Recoverabilityof net assets of discontinued operations, notes receivable and accruedinterest, and investments.

•                  Income tax provision,deferred tax assets and liabilities and related valuation allowance.

•                  Use of the equity method of accounting forKaiser-Hill, an affiliate the Company has the ability to significantlyinfluence but not control.  Inaccordance with the equity method of accounting, we record our proportionateshare of the affiliate’s income or losses. The difference between the carrying value of the joint ventureinvestment and our underlying equity is amortized on a straight-line basis overthe term of the joint venture investment, estimated at six years.

 

8

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•                  Estimated feeson the Kaiser-Hill joint venture.  Estimating future costs and,therefore, revenues and profits, is a process requiring a high degree ofjudgment, including assumptions regarding future operations of Kaiser-Hill aswell as general economic conditions.  Inthe event of a change in total estimated contract cost or profit, thecumulative effect of such change is recorded in the period the change in estimateoccurs.  The period of performance ofthe Kaiser-Hill contract extends over a long period of time and, as such,revenue recognition and our profitability from this contract may be adverselyaffected to the extent that estimated cost to complete or incentive or awardfee estimates are revised, delivery schedules are delayed, or progress underthe contract is otherwise impeded. Accordingly, our recorded revenues and gross profits from year to yearcan fluctuate significantly. TheKaiser-Hill contract contains incentive provisions for increased or decreasedrevenue and profit based on actual performance against established cost targetsand schedule-related goals.  Incentivefees are included in estimated contract revenue at the time the amounts can be reasonablydetermined and are reasonably assured based on historical experience and otherobjective criteria.  Should Kaiser-Hillfail to perform satisfactorily under its contract, previously recognizedrevenues could be reversed and/or future period revenues could be reduced.

•                  Our liability inconnection with a post-employment medical benefit plan for a fixed group ofretirees.  This liability is affected bychanges in the discount rate, medical cost trend rates and certain actuarialassumptions.  Should actual rates andresults differ from the assumptions used, revisions to the liability would berequired resulting in additional income statement charges.

 

**Results of Operations**

** **

*Years Ended December 31, 2003, 2002 and 2001*

 

*Equity Income In Earnings of Affiliate*

 

Our major remaining source of incomeis a 50% ownership in Kaiser-Hill Company, LLC, which performs all elements ofdaily and long-term operations associated with the ultimate closure of theDepartment of Energy’s (DOE) Rocky Flats site, including stabilizing and safelystoring radioactive material, cleaning up areas contaminated with hazardous andradioactive waste, and restoring much of the 6,000-acre Rocky Flats site to itsnatural state for future use by the public. Kaiser-Hill is owned equally byKaiser Holdings and CH2M Hill Companies Ltd. CH2M Hill designates three of the five members of Kaiser-Hill’s Board ofManagers and we designate two members. The financial information containedherein for Kaiser-Hill is reflected on the equity basis.  Because Kaiser-Hill represents a significantportion of our financial position and results of operations, the auditedfinancial statements of Kaiser-Hill are included in this report (see pages F-21to F-31).

 

*Closure Contract Provisions for Revenue andPerformance Award*

 

Theeconomic terms of the Closure Contract provide that Kaiser-Hill will earnrevenue equal to the actual cost of physical completion plus a performance feebased on a combination of factors involving the actual cost of completing thesite closure project and the actual date of physical completion, both ascompared to contracted targets.  OnMarch 24, 2004 Kaiser-Hill received a contract modification that motivates safecontinuing positive performance by increasing the maximum fee ceiling that maybe earned under the Closure Contract. The same contract modification reduces the minimum fee floor andincludes other provisions related to work scope changes.  The potential fee to be earned pursuant tothe Closure Contract as recently modified ranges from $75.0 million to $560.0million based on Kaiser-Hill’s costs to complete the site closure being withinthe range of completion costs of $3.12 billion and $4.86 billion, andcompletion at various dates between 2005 and 2007.  For project costs saved below the target level, Kaiser-Hillretains a varying percentage share ranging from 20% to 30% as additionalincentive fee.  Similarly, for projectcosts incurred above a target level, Kaiser-Hill’s incentive fee is reduced bythe 30% share.

 

Duringearly 2001, Kaiser-Hill reduced its estimate of total cost at completion to$4.5 billion from the original $4.8 billion. This reduction in estimated cost at completion had the financialstatement result of increasing its accrual of the fee to be earned over thecontract duration from $150.0 million to $180.0 million.  Kaiser-Hill continued to make favorableprogress on the Closure Contract during 2001 and, during the quarter endedDecember 31, 2001, amended its estimate for the physical contract completiondate from December 31, 2007 to December 31, 2006 and changed its estimate ofthe total cost to be incurred during the Closure Contract duration to be below$4.0 billion.  Therefore, Kaiser-Hillmanagement increased its estimate of the fee to be earned over the contractduration from the $180.0 million to $355.0 million.  Because Kaiser-Hill uses the percentage of completion method forthe performance fee recognition on the Closure Contract, the effect ofincreasing its performance fee estimate on the project from $180.0 million to$355.0 million resulted in recording additional earnings of $50.6 million as achange in estimate in the fourth quarter of 2001.  The additional earnings were partially offset by a $34.8 millionincrease in certain project contingency reserves.  Therefore, the overall fourth quarter adjustment in 2001 was$15.8

 

9

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million.  Kaiser-Hill’s favorable progress continuedthroughout 2002 and, during the quarter ended December 31, 2002, managementreduced the amount of project contingency reserves by the exact amount asaccrued a year earlier – thus having the effect of increasing contract-to-dateearnings by $34.8 million in the fourth quarter of 2002.  Also during the fourth quarter of 2002, theDOE awarded Kaiser-Hill an additional $23.0 million in fee based onKaiser-Hill’s continued reductions in its estimates of total cost to completethe Closure Contract.

 

Kaiser-Hill’sfavorable performance on the contract since its inception in February of 2000has resulted in a trend of cautious but continuously improving estimates ofcompletion dates, cost estimates and potential fee earning opportunities.  As of December 31, 2003, Kaiser-Hill’s costestimate to complete the project is $3.75 billion, with an estimated completiondate of December 2006, resulting in a potential total fee of $424 million.  The recent contract modification providesadditional performance fee incentives, and Kaiser-Hill plans to manage towardfurther improved performance in terms of both project cost and schedule.  But there are substantial risks anduncertainties associated with Kaiser-Hill’s ultimate performance (see “RiskFactors Relating to Kaiser Holdings and Forward-Looking Statements” below), andKaiser-Hill does not expect to achieve all, or nearly all, of the increase inthe new maximum fee potential.  Althoughthe range of feasible enhanced performance fee earnings by Kaiser-Hill could bematerial to our operating results, due to the continuing uncertainties related toultimate project performance, the contract modification has no current impactto, or affect on, our financial performance recognition for Kaiser-Hill.

 

Forthe years ended December 31, 2003, 2002 and 2001, we recorded our 50% equity inKaiser-Hill’s income of $20 million, $36.8 million and $15 million,respectively.  Fluctuations in theKaiser-Hill earnings between 2003, 2002 and 2001 are entirely due to thecumulative effects of accounting for periodic changes in the projected fee tobe earned upon the completion of the project. Kaiser-Hill’s estimate of the final performance fee to be earned uponcompletion of the contract has increased from $340 million to $363 million to$388 million as of December 31, 2001, 2002 and 2003, respectively.  The changes in estimate of the completionfees are typically generated during the fourth quarter of each year asmanagement completes its annual assessment of project performance.  In addition to the changes in estimate,Kaiser-Hill released project contingency reserves during 2002 that had theeffect of increasing their net earnings by more than just the change in feeestimate thus the larger net income fluctuation in 2002.

 

For the years ended December31, 2003, 2002 and 2001, the equity income in earnings of affiliate is net of$3.5 million of amortization of the excess of our carrying value of ourinvestment in Kaiser-Hill over our ownership percentage of the underlyingKaiser-Hill equity.  We increased thecarrying value of this investment by $21.1 million as part of our adoption ofFresh-Start reporting as of December 31, 2000 and will continue to amortizethat difference over the duration of the Kaiser-Hill closure contract with theDOE (currently estimated to be complete by December 31, 2006).

 

*Closure Contract Billing Provisions*

 

Since the inception of theClosure Contract in February 2000 through December 31, 2003, Kaiser-Hill hasinvoiced DOE for the performance fee based on the contract provisions, and hascollected an aggregate of $115.85 million in fees from the DOE.

 

Fee payments made by DOE toKaiser-Hill, less certain non-reimbursable costs, will continue to bedistributed to the joint venture owners upon receipt.  Kaiser-Hill has historically incurred expenses that are not reimbursableby the DOE pursuant to the Federal regulations.  Accordingly, such expenses, which Kaiser-Hill estimates couldapproximate up to 15% - 20% of the total award fee, are deducted from the totalfee earned and collected by Kaiser-Hill prior to any distributions to either ofits two owners.  Since inception of theClosure Contract through December 31, 2003, Kaiser-Hill has distributed $46.6million to each of its two owners.  Adjusted for the effects of the 50%retainage holdback, Kaiser-Hill expects that its performance fee invoices toDOE will yield distributions of $3.5 million per quarter to each of its twoowners in 2004.  Similar to 2002 and2003, Kaiser-Hill is anticipating that DOE will approve a non-recurring feepayment during the fourth quarter of 2004 acknowledging Kaiser-Hill’s continuedfavorable progression on the project. Historically, the fourth quarter fee payment has ranged from anadditional $10.0 million to $16.0 million above the typically recurringquarterly fee payment.  However, thereare no assurances as to the amount or timing of any additional fourth quarterfee payment.

 

In the future, as Kaiser-Hillcontinues to accrue performance fees based on its currently projected total,less reserves deemed appropriate in the circumstances, and remains subject to a50% retainage holdback on its performance fee invoicing, the level of unbilledaccounts receivable on its balance sheet will begin to increasesubstantially.  Kaiser-Hill willclassify the difference between recorded performance fees and the collected feesas long-term unbilled accounts receivable on its balance sheet, which will beincluded as a component of Investment in Affiliate on the Company’s balancesheet.  The Closure Contract alsocontains provisions for DOE to release portions of the retainage holdback priorto contract completion if the DOE deems appropriate.  Kaiser-Hill is not able to estimate whether any of the retainageholdback will be released prior to contract completion.

 

10

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*Gain on Demutualization and Gain on Sale ofSecurity*

 

Duringthe year ended December 31, 2001, we benefited from the fact that we hadpurchased retirement annuity contracts during the 1980’s for a capped group ofemployees.  Kaiser Group International,Inc. paid 100% of the premiums for the retirement annuity contracts, and suchannuities represented the entire amount of this particular retirement benefitobligation to the covered employees at the time.  Having paid 100% of the insurance premiums, we became a mutualstockholder in the Prudential Insurance Company.  Due to the illiquid nature of ownership in a mutual stockholderorganization, Kaiser Group International, Inc. did not have a balance sheetcarrying value ascribed to this asset. During November 2001, however, the Prudential Insurance Companydemutualized its ownership structure through an initial public offering of itscommon stock.  As a result of thedemutualization of the Prudential holdings, we became the beneficial holder ofapproximately 195,000 shares of Prudential common stock and accordinglyrecorded a gain on the demutualization totaling $5.9 million, net of income taxexpense of $2.2 million, in December 2001.

 

InFebruary 2002, we sold all of our shares of Prudential common stock, and anadditional gain of $0.1 million was recorded on sale of security.

 

*Gain on Sale ofInvestment*

 

OnSeptember 30, 2002, the terms of a settlement agreement with ICF ConsultingGroup, Inc. (ICF Consulting) were implemented. Under this settlement, we restructured the ICF Consulting notes totaling$6.6 million and accrued interest of $0.7 million, net of reserves, for a newsubordinated promissory note of $6.4 million, resulting in a write-off of $0.8million and establishment of a $0.5 million contingency reserve.  In return ICF Consulting withdrew its claimsagainst us, released cash in escrow totaling $0.8 million and purchased our 10%ownership in ICF Consulting, carrying value of $1.1 million, for $4.5million.  We recorded a gain of $3.4million on the sale of the investment in ICF Consulting.

 

*Write-off of NotesReceivable and Accrued Interest*

 

As a result of the above-mentioned settlementagreement with ICF Consulting, we recorded the new ICF Consulting note of $6.4million and wrote off the remaining balance in the notes receivable and accruedinterest totaling $0.7 million.  In light of the fact that ICF Consulting haddefaulted on the previously held ICF Consulting notes and the subordinatednature of the new note, we have also recorded a reserve of $0.5 million due to uncertainties as to theultimate collectibility of the new note and accrued interest.

 

*Interest Income*

 

We earninterest on our available cash balances and on the note receivable from ICFConsulting (see above discussion related to settlement with ICFConsulting).  Interest income increasednominally in 2003, in spite of a decline in average cash balances, due to afull year of accrual of interest on the ICF Consulting note receivable.  Interest income in 2002 compared to 2001declined by $0.3 million due primarily to the partial forgiveness of interestincome on the previous note receivable from ICF Consulting.

 

Interestincome earned in 2001 was based in part on available cash balances, generallyasset sale proceeds remaining from 2000 and restricted cash balances maintainedfor statutory purposes by our wholly-owned captive insurance subsidiary andamounts required under the Plan of Reorganization. Based on the developments in2001, we recorded a $1.0 million reserve for uncertainties related to thecollectibility of the ICF Consulting promissory notes and the related accruedinterest. This reserve was recorded as a reduction to interest income as it hadthe effect of reversing the interest accrued on the notes during 2001.

 

*Administrative Expenses*

 

Administrativeexpenses for the years ended December 31, 2003, 2002 and 2001 consisted largelyof salaries, legal and professional fees incurred for activities associatedwith the bankruptcy proceedings or with winding down of historical operationsas well as the cost to fund a certain retiree medical commitment.  Administrative expenses for the year endedDecember 31, 2003 compared to December 31, 2002 declined by $2.1 millionprimarily due to a reduction in legal and professional fees incurred forbankruptcy claims resolution. Administrative expenses for the year ended December 31, 2002 compared toDecember 31, 2001 declined by $2.7 million primarily due to a $1.6 millionreduction in legal and professional fees incurred for bankruptcy claimsresolution, including the Nova Hut and ICF Consulting claims, a $0.7 millionreduction in salaries and benefits, and a $0.4 million reduction in rentexpense.  The expense for the retireemedical commitment remained relatively unchanged for the three years endedDecember 31, 2003, 2002 and 2001 at approximately $1.0 million per year.  As

 

11

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wecontinue to make progress on winding down the operations of Kaiser GroupInternational, Inc. and in resolving remaining bankruptcy claims, we anticipatefurther declines in general and administrative spending.

 

In the fourth quarter of 2001, we recorded a $1.1 millionimpairment charge related to our then 10% interest in ICF Consulting Group,Inc., a privately held entity that was retained by Kaiser Group International,Inc. when it sold its Consulting Group in June 1999.  The impairment charge was based on management’s assessment of thepotential proceeds available if this investment were liquidated.

 

*Loss from Discontinued Operations*

 

Inaddition to matters surrounding the resolution of the Nova Hut dispute,Discontinued Operations also reflects the net income statement activityresulting from the winding down of the discontinued engineering operations.  At December 31, 2003, based upon the lack ofsignificant favorable developments with the Nova Hut claim in the past twoyears and the time that has elapsed since completion of the project, theCompany established additional reserves to further reduce the net carryingvalue of the remaining Nova Hut project to $3.0 million by recording anadditional reserve of $3.0 million offset by an income tax benefit of $1.1million, through a charge to “Loss from Discontinued Operations”.  This charge is offset byincome from discontinued operations of $0.4 million from the collection offoreign accounts receivable, which had previously been fully reserved.

 

During2002, we successfully prosecuted an aged claim against a former subcontractorand collected an account receivable, from a previous foreign engineeringproject, that had previously been written off. Net of legal fees, these activities resulted in the Company’s collectionof $0.6 million. In 2001, based on our concern over Nova Hut’s financial difficultiesand the uncertainties of a settlement involving a bankruptcy court-sponsoredmediation, we reserved approximately $15.6 million of the carrying value of theremaining Nova Hut project assets from $21.6 million to $6.0 million.  We also recorded an income tax benefit of$5.8 million associated with this reserve. Other out-of-pocket costs wereincurred for winding down the project’s site operations during early 2001,including severance and relocation costs for returning project expatriates backto the United States.

 

*IncomeTaxes*

* *

During 2003, we recognized atotal income tax expense of $3.8million allocable to the following results (in thousands):

 

 
| **Statements of Operations Category**                  |   | **Pre-tax  Income/(Loss)** |   | **Applicable  Income Tax  (Expense)/Benefit** |   |
|--------------------------------------------------------|--------|----------------------------|--------|-----------------------------------------------|--------|
| Income from continuing operations before  income taxes |   | $                          | 11,028 |                                          | $      | (4,827 | ) |
| Income/(Loss) from discontinued operations             |   | (2,956                     | )      | 1,123                                         |   |
|                                                   |   |                       |   | $                                             | (3,704 | ) |
|                                                        |        |                            |        |                                               |        |  |  |

 

During 2002, we recognized atotal income tax expense of $11.6million allocable to the following results (in thousands):

 

 
| **Statements of Operations Category**                  |   | **Pre-tax  Income/(Loss)** |   | **Applicable  Income Tax  (Expense)/Benefit** |    |
|--------------------------------------------------------|--------|----------------------------|--------|-----------------------------------------------|---------|
| Income from continuing operations before  income taxes |   | $                          | 29,165 |                                          | $       | (11,319 | ) |
| Income/(Loss) from discontinued operations             |   | 847                        |   | (350                                          | )       |
|                                                   |   |                       |   | $                                             | (11,669 | ) |
|                                                        |        |                            |        |                                               |         |  |  |

 

During2001, we recognized a total income tax benefit of $3.8 million allocableto the following results (in thousands):

 

 
| **Statements of Operations Category**                  |   | **Pre-tax  Income/(Loss)** |   | **Applicable  Income Tax  (Expense)/Benefit** |   |
|--------------------------------------------------------|--------|----------------------------|--------|-----------------------------------------------|--------|
| Income from continuing operations before  income taxes |   | $                          | 7,657  |                                          | $      | (2,417 | ) |
| (Loss) from discontinued operations                    |   | (16,409                    | )      | 6,212                                         |   |
|                                                   |   |                       |   | $                                             | 3,795  |   |
|                                                        |        |                            |        |                                               |        |  |  |

 

12

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*Treatment of Net Operating Loss Carryforwards*

 

In December 2000 we wentthrough a change in control as defined under Internal Revenue Code (IRC)Section 382 due to the Chapter 11 bankruptcy reorganization.  In September 2001 we determined that thechange in control met the stringent guidelines of the bankruptcy exceptionprovided under the Internal Revenue Code. Thisresulted in our not being subject to the carryforward limitations of IRC Sec.382.  However, we were required toreduce certain carryovers that included net operating losses and credits.  We offset the reduction of the carryforwardswith the valuation allowance previously established for those carryforwards,and, as a result, the effective income tax rate for income from continuingoperations differed significantly from statutory rates.  All remaining net operating losscarryforwards were utilized in 2003.

 

**Liquidity and CapitalResources**

 

*Years Ended December 31, 2003, 2002 and 2001*

 

OperatingActivities:  We used $10.4 million incash for operating activities in 2003, $6.3 million in 2002 and $13.3 millionin 2001.  This use of cash included $4.9million, $7.0 million and $9.7 million, respectively, for general andadministrative expenses incurred during 2003, 2002 and 2001.  Additionally, in 2001 we used $3.6 millionfor severance and professional fees incurred prior to 2001 in connection withthe debt restructuring, bankruptcy and winding-down activities in 2000 and $0.6million in cash used to satisfy Class 3 bankruptcy claims (former tradeaccounts payable not paid until after the Plan of Reorganization was deemedeffective in December 2000).

 

InvestingActivities:  During the years endedDecember 31, 2003, 2002 and 2001, Kaiser-Hill distributed $16.4 million, $15.7million and $7.9 million each to us and to the other 50% owner, CH2M Hill.  For the year ended December 31, 2002, wealso received $4.5 million from the sale of our investment in ICF Consultingand $6.0 million from the sale of our Prudential securities.

 

FinancingActivities:  During the years endedDecember 31, 2003, 2002 and 2001, we paid $2.2 million, $4.2 million and $2.4million, respectively, in dividends on our preferred stock.  Due to the adoption of FAS 150 effectiveJuly 1, 2003, $1.4 million of preferred stock dividends have been shown asinterest expense and are no longer reflected as preferred stock dividends onthe statement of cash flows.  In 2003 weacquired 6,848 shares of preferred stock for $0.3 million and 2002 we acquired119,587 shares of preferred stock for $4.0 million.  As a result of the Prudential stock sale and the sale of theinvestment in ICF Consulting discussed above, we are required, in accordancewith the Plan, to use a portion of the proceeds from any asset sales solely forthe redemption of the outstanding preferred stock.  Pursuant to this requirement, we earmarked approximately $4.5million of the sale proceeds as restricted cash to be used for the futurepreferred stock redemptions.

 

During2002, $0.8 million of restricted cash was released as a part ofthe settlement agreement with ICF Consulting and $0.6 million of restrictedcash in our captive insurance company was released from restriction by theinsurance regulators.

 

During 2003, we redeemed a total of 370,730 shares of outstandingpreferred stock, net of 24,964 shares of treasury stock, through two separateredemptions.  In January and October2003, the Company redeemed $15.5 million and $6.2 million, respectively,liquidation preference of New Preferred or 282,000 and 113,530 shares,respectively, in accordance with the terms of the Kaiser Group InternationalPlan of Reorganization and the KGP put rights described in Note 8 to theConsolidated Financial Statements.

 

In February 2003, the Company utilized excessoperating cash and the excess restricted cash balances to redeem $5.3 millionliquidation preference of New Preferred or 95,932 shares.  Our Board of Directors will continue toevaluate on a quarterly basis additional redemptions of preferred stock.

 

Atseveral times during 2001, but primarily in April 2001 as part of our initialbankruptcy distribution, we paid out $13.7 million representing the cashportion of Class 4 bankruptcy claim resolutions.  Also as of April 2001, we transferred $12.3 million to a separatereserve cash account to be used to fund the cash portion of any remaining Class4 bankruptcy claims settlements (including any earned dividends on subsequentlyissued preferred stock). In June 2001, we used $125,000 to finalize a tenderoffer to repurchase odd-lot shares of less than 99 in total holdings at $5.00per common share.

 

*Liquidity and Capital Resources Outlook*

 

We currently have no debt as aresult of the effectiveness of the Plan of Reorganization. We continue tofinance the bankruptcy distribution requirements and follow-on working capitalneeds in part through the use of the available cash and distributions from Kaiser-Hilland from other asset sale proceeds. Based on (i) current expectations foroperating activities and results, (ii) expected Kaiser-Hill distributions,(iii) our current available cash position, (iv) recent trends and projectionsin

 

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liquidity and capital needs,and (v) current expectations of total allowed claims upon the completion of thebankruptcy proceedings, management believes we have sufficient liquidity tocover our future operating needs and income tax requirements, as well as thedividend requirements applicable to our preferred stock.  Furthermore, we will continue to review thetiming of additional partial preferred stock redemptions.

 

We haveobligations to pay interest on outstanding preferred stock at December 31,2003, which has been shown as interest expense effective July 1, 2003.  Accordingly, we are required to present thefollowing table assuming that no additional preferred stock redemptions aremade until the mandatory redemption date of December 31, 2007, no additionalshares are issued and that all future dividends are paid in cash (irrespectiveof this disclosure requirement, we are not representing intentions with regardto the timing of additional preferred stock redemptions).  The effect these obligations are expected tohave on our liquidity and cash flow in future periods are as follows (adjustedfor the preferred stock redemption of $5.3 million in February 2004):

 

 
|                      |   | **Total** |   | **Less Than One   Year** |   | **One to Three   Years** |   | **After Three  Years** |   |
|---------------------------|--------|-----------|--------|--------------------------|--------|--------------------------|--------|------------------------|--------|
| Preferred Stock dividends |   | $         | 8,485  |                     | $      | 2,206                    |   | $                      | 4,186  |   | $ | 2,093 |   |
|                           |        |           |        |                          |        |                          |        |                        |        |  |  |  |  |

 

*Other Matters*

 

We havevarious obligations and liabilities from our continuing operations, includinggeneral overhead expenses in connection with maintaining, operating and windingdown various entities.  Additionally, webelieve contingent liabilities may exist in the areas described in Note 14 tothe Consolidated Financial Statements for the periods ended December 31, 2003,2002 and 2001.

 

**Recent Accounting Pronouncements**

 

In January 2003, theFinancial Accounting Standards Board (FASB) issued Interpretation (FIN) 46,“Consolidation of Variable Interest Entities,” which provides guidance on whento consolidate variable interest entities. In December 2003, FASB revisedFIN 46 with FIN 46R. In addition to conforming to previously issued FASB StaffPositions, FIN 46R deferred the implementation date for certain variableinterest entities. We will adopt the provisions of FIN 46R immediately forentities created after December 31, 2003. For entities created beforeDecember 31, 2003, we will adopt FIN 46R in the first quarter of 2005, asrequired by FIN 46R.  We currently do not have any entities thatwould be considered variable interest entities under FIN 46R.

 

On May31, 2003, FASB issued FASB Statement No. 150 (FAS 150), “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities andEquity.”  FAS 150 improves theaccounting for certain financial instruments that, under previous guidance,issuers could account for as equity and requires that those instruments beclassified as liabilities (or assets in certain circumstances) in statements offinancial position.  FAS 150 alsorequires disclosures about alternative ways of settling the instruments and thecapital structure of entities – all of whose shares are mandatorilyredeemable.  FAS 150 was to have beengenerally effective for all financial instruments entered into or modifiedafter May 31, 2003, and otherwise effective at the beginning of the first interimperiod beginning after June 15, 2003. Recently, the FASB has deferred for an indefinite period the effectivedate for certain instruments and entities. As discussed in Note 8 of the Consolidated Financial Statements, theCompany has adopted the provisions of FAS 150 in the third quarter of 2003.

 

In December 2003, the FASBissued SFAS No. 132 (Revised 2003), “Employers’ Disclosures about Pensionsand Other Postretirement Benefits.” SFAS No. 132(R) increases the existingdisclosure requirements by requiring more details about pension plan assets,benefit obligations, cash flows, benefit costs and related information.Companies will be required to segregate plan assets by category, such as debt,equity and real estate, and to provide certain expected rates of return andother informational disclosures. The new disclosure requirements required bySFAS No. 132(R) are effective for us for the year ending afterJune 15, 2004. We will adopt the new SFAS No. 132(R) disclosurerequirements for the year ending December 31, 2004.

 

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**RISK FACTORS RELATING TO KAISER HOLDINGS AND**

**FORWARD-LOOKING STATEMENTS**

 

This Annual Report on Form 10-Kcontains, and our periodic filings with the Securities and Exchange Commissionand written or oral statements made by ourofficers and directors to press, potential investors, securities analysts andothers, may contain, forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934.  Theseforward-looking statements are not historical facts, but rather are predictionsand generally can be identified by use of statements that include phrases suchas “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “foresee”or other words or phrases of similar import. Similarly, statements that describe or contain information related to matters such as our intent, belief, orexpectation with respect to financial performance, claims resolution, cash availability,stock redemption plans, contract awards and performance, potential acquisitionsand joint ventures, and cost-cutting measures are forward-looking statements. Theseforward-looking statements often reflect a number of assumptions and involveknown and unknown risks, uncertainties and other factors that could cause ouractual results to differ materially from those currently anticipated in theseforward-looking statements.  In light ofthese risks and uncertainties, including those described below, theforward-looking events might or might not occur.

 

**Ourremaining primary source of funding is from Kaiser-Hill distributions, whichare subject to uncertainties that may adversely impact our ability to meet ourobligations on our preferred stock and to permit our consideration and fundingof strategic alternatives for the Company.**

 

*The fee income we anticipate  receiving in the future  from Kaiser-Hill is dependent upon theability of Kaiser-Hill to close the Rocky Flats site at a predetermined targetedcost of between $3.6 billion and $4.8 billion and closing date ranging fromDecember 31, 2005 to not later than March 31, 2007, both of which are subjectto operational risks and uncertainties.*

 

Our long-term outlook islargely dependent on the performance of Kaiser-Hill under its contract with theDepartment of Energy.  Kaiser-Hillserves as the general contractor at the Rocky Flats Environmental Technologysite near Denver, Colorado, a former nuclear weapons production facility.  Kaiser-Hill’s contract with the Departmentof Energy includes a performance fee based upon a combination of the actualcosts incurred to complete the site closure and the actual date of completionof the closure.  Although unanticipated,if Kaiser-Hill fails to complete the closure within the target cost for theproject, Kaiser-Hill’s fee will be reduced to a level significantly less thanthe fee estimate currently being used to recognize income on the project.

 

Kaiser-Hill hashistorically incurred expenses that are not reimbursable by the Department ofEnergy pursuant to the federal regulations. Accordingly such expenses, which Kaiser-Hill estimates could approximateup to 15% - 20% of the total award fee, will be deducted from the total feeprior to any distributions to its two owners. For reasons similar to thosedescribed in the following paragraph, it is difficult to estimate either theamount of net fee to be distributed to the owners of Kaiser-Hill and or theeffect, if any, that such unreimbursable costs would have on our future cashflows.  A decrease in our cash flowscould result in a decrease in the value of our common and preferred stock.

 

*There are substantial performance risksassociated with Kaiser-Hill’s work at the Rocky Flats site.  The performance risks may impact the timingand cost of closing the site, which in turn could impact our fee income fromKaiser-Hill.*

 

Theclean-up and closure of the Department of Energy’s Rocky Flats site involve substantial performance risks.  Among other things, Kaiser-Hill’s activitiesat the Rocky Flats site involve the clean-up, packaging and transportation ofnuclear waste, and the demolition and destruction of facilities where nuclearweapons components were previously produced. Some of these activities have not been previously performed elsewhere,and therefore require the development of innovative and untestedapproaches.  Kaiser-Hill emphasizessafety in its performance, but the nature of the Rocky Flats site and theactivities of Kaiser-Hill and its subcontractors at the site are such thatserious injuries, or even deaths, are possible.  Significant safety incidents at the site could stop orsignificantly impede the progress of work being performed at the site byKaiser-Hill and its subcontractors.  TheDepartment of Energy contractcontemplates that all, or substantially all, of the nuclear waste at RockyFlats will be transported to other sites operated or managed by the Departmentof Energy. The appropriate sites for storage of certain of those nuclear wasteshave not yet been identified.  Inaddition, third-party objections have arisen from time to time with regard tothe transportation to, and storage of nuclear waste at, certain sitespreviously designated by the Department of Energy to receive waste from RockyFlats.  Although the Department ofEnergy contract contemplates that the Department of Energy is responsible forproviding transportation and storage sites for nuclear waste from Rocky Flats,an inability to store nuclear waste at other Department of Energy sites wouldpose a substantial risk to the timely closure of the Rocky Flats site, andcould interfere with Kaiser-Hill’s ability to earn the fees to whichKaiser-Hill believes it should be entitled. This loss of fee income could adversely affect our operating results,which could in turn result in a decrease in the value of our common andpreferred stock.

 

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*There are potential substantial liabilitiesand costs associated with Kaiser-Hill’s Department of Energy contract, whichmay directly and indirectly impact our fee income from Kaiser-Hill.*

 

Underthe Department of Energy contract, Kaiser-Hill is responsible for, and theDepartment of Energy will not pay for costs associated with, liabilities causedby the willful misconduct or lack of good faith of Kaiser-Hill’s managerialpersonnel or the failure to exercise prudent business judgment by Kaiser-Hill’smanagerial personnel. If Kaiser-Hill were found liable for any of thesereasons, the associated costs could be substantial, which could have an adverseeffect on our operating results. A decrease in our operating resultscould cause a decrease in the value of our common and preferred stock.

 

**We face significant contingencies,which may adversely impact our ability to meet our obligations on our preferredstock, to fund our continuing operations and to undertake new operations.**

 

*We do not have a business plan beyondKaiser-Hill and we may or may not undertake new activities.*

 

Ourlong-term future profitability will be dependent, to a significant extent, onour ability to develop a business plan for ongoing operations. Unless and untilour Board of Directors develops such a business plan, we are unable todetermine either the amount of risk that future operations will involve orwhether we have the ability to realize long-term profitability. It is possiblethat our ongoing business plan will be limited to resolving issues related tothe Nova Hut project and participating in the activities of Kaiser-Hill.  However, our Board of Directors isconsidering whether we should attempt to develop a new revenue base.  Such efforts could, for example, attempt totake advantage of our successful history of performing in the government servicesmarket, both independently and through Kaiser-Hill.  Our efforts to develop a revenue base separate from Kaiser-Hillmay involve start-up activities with risks peculiar to activities of this type,which may adversely impact our cash flow and operating results. Adecrease in our cash flows and operating results could result in a decrease inthe value of our common and preferred stock.

 

*We may be unable to obtain performanceguarantees, which may limit our ability to undertake new activities.*

 

Giventhe reorganization history of Kaiser Group Holdings, Inc., we may not be ableto obtain satisfactory contract performance guaranty mechanisms, such asperformance bonds and letters of credit, at all or on satisfactory terms, tothe extent such mechanisms are needed for new projects.  These factors could limit the nature of thebusiness activities in which we could engage should we decide to attempt todevelop a new revenue base apart from Kaiser-Hill, which may adversely impactour cash flow and operating results and result in a decrease in thevalue of our common and preferred stock.

 

*We may be unable to generate funds to meetour obligations and we may be unable to access additional capital.*

 

Wemay be unable to continue to generate sufficient funds to meet our obligations,notwithstanding the significant improvements in our operations and financialcondition.  Although we believe that wewill be able to generate sufficient funds to meet our working capital needs forthe foreseeable future, our ability to gain access to additional capital, ifneeded, is not certain. Due to reorganization history of Kaiser Group Holdings,Inc. and current financial markets, it is difficult to predict whetheradditional capital would be available to us in the event that we were unable togeneral funds to meet our obligations. Our inability to gain access to additional capital may also limit ourability to undertake new activities. Ultimately, our inability to meet our existing obligations or toundertake new activities could adversely impact our cash flow and operating results.  A decrease in our cash flows andoperating results could result in a decrease in the value of our common andpreferred stock.

 

*We mayhave to issue a substantial number of additional common shares.*

 

On January 20, 2004, the United States Bankruptcy Court for theDistrict of Delaware ruled on a claim in favor of former shareholders of ICTSpectrum Constructors, Inc.  TheBankruptcy Court has refused to reconsider its decision and we plan to appeal.  Should we be unsuccessful in our efforts toachieve reversal of the Bankruptcy Court’s ruling, we could be required toissue an additional 247,350 common shares, which would then compriseapproximately 13.4% of the aggregate shares outstanding.  We believe that issuing such a substantialnumber of additional common shares could be expected to have a materiallydilutive effect on the value of common shares presently outstanding.

 

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*In theevent of a change of control, we may not have the financial resources to redeempreferred stock.*

 

Our preferred stock is redeemable at theoption of the holder upon a change of control as defined in the terms of thepreferred stock.  We are not presentlyaware of any events that would cause a change of control.  However, based on a Report on Form 4 datedApril 3, 2003, which was filed with the Securities and Exchange Commission byTennenbaum & Co., LLC on April 3, 2003, we believe that Tennenbaum &Co., LLC and Michael E. Tennenbaum together own approximately 47.2% of our commonstock.  The terms of our preferred stockprovide that a change of control occurs when, among other things, a person or“group” (within the meaning of Section 13(d)(3) of the Securities Exchange Actof 1934) directly or indirectly acquires “beneficial ownership” (as defined inRule 13d-3 under the Securities Exchange Act of 1934) of more than 50% of allclasses of our common equity (defined in the terms of our preferred stock ascapital stock entitled to vote in the election of directors).

 

In the event that we arerequired to redeem preferred stock due to a change of control, we may not haveavailable capital to redeem the stock. Our ability to gain access toadditional capital from outside sources, if needed, is not certain.  The inability to gain access to additionalcapital may limit our ability to meet the redemption obligations with respectto the preferred stock.

 

**Item 7A.                 Quantitativeand Qualitative Information about Market Risk**

 

We do notbelieve we have significant exposures to market risk as we do not presentlyhave any debt.  The interest rate riskassociated with our obligation to fund a capped retiree medical obligation isnot sensitive to interest rate risk other than through the determination of thepresent value of its remaining obligation thereunder.  A 10% increase or decrease in the average annual prime rate wouldresult in an increase or decrease in the carrying value of the plan obligationbut would not change the actual cost of the plan.

 

**Item8.                    Financial Statementsand Supplementary Data**

 

TheFinancial Statements and Supplementary Data appear on pages F-1 through F-31and S-1 through S-2 hereto.

 

**Item9.                    Changes in andDisagreements with Accountants on Accounting and Financial Disclosures**

 

None.

 

**Item9A.                 Controls and Procedures**

 

As of the end of the period covered by thisreport, our Chief Executive Officer and Chief Financial Officer evaluated, withthe participation of our management, the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934).  Basedon this evaluation, our Chief Executive Officer and Chief Financial Officerhave concluded that our disclosure controls and procedures are effective toensure that material information is recorded, processed, summarized andreported by our management on a timely basis in order to comply with ourdisclosure obligations under the Securities Exchange Act of 1934 and the SECrules thereunder.  There were nosignificant changes in our internal controls over financial reporting thatoccurred during the fiscal year ended December 31, 2003 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

**PART III**

 

**Items 10****, 11, 12, 13 and 14.**

 

Information required by PartIII (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K isincorporated by reference from our definitive Proxy Statement for our AnnualMeeting of Shareholders to be held on May 5, 2004, which will be filed with theSecurities and Exchange Commission, pursuant to Regulation 14A, not later than120 days after the end of the fiscal year, except that the information requiredby Item 10 with respect to executive officers of the Company is included inItem 4A of Part I of this Annual Report on Form 10-K.

 

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**PART IV**

 

###### **Item 15.**                 Exhibits,Financial Statement Schedules and Reports on Form 8-K

 

**(a)****          Documents filed as part of this Report**

 

**1.     FinancialStatements**

 

Consolidated Financial Statements of KaiserGroup Holdings, Inc. and Subsidiaries

 

 
| a. | Report of Independent Accountants                                                                                                                     |   |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| b. | Consolidated Balance Sheets as of December 31, 2003 and December 31,  2002                                                                            |   |
| c. | Consolidated Statements of Operations for  the years ended December 31, 2003, 2002 and 2001                                                           |   |
| d. | Consolidated Statements of Shareholders’  Equity (Deficit) and Comprehensive Income (Loss) for the years ended December  31, 2003, 2002 and 2001 |   |
| e. | Consolidated Statements of Cash Flows for  the years ended December 31, 2003, 2002 and 2001                                                           |   |
| f. | Notes to Consolidated Financial Statements.                                                                                                           |   |

 

**2.     FinancialStatement Schedules**

 

Supplemental Schedule Relating to theConsolidated Financial Statements of Kaiser Group Holdings Inc. andSubsidiaries for the years ended December 31, 2003, 2002 and 2001.

 
| a.     | Financial Statements of Kaiser-Hill Company,  LLC as of December 31, 2003 and 2002 and for the three years ended December  31, 2001. |                                           |
|--------|--------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------|
|   |                                                                                                                                 |
| b.     | (i)                                                                                                                                  | Report of Independent Accountants              |   |
|   | (ii)                                                                                                                                 | Schedule II: Valuation and Qualifying Accounts |   |

 

All Schedules except the ones listed abovehave been omitted because they are not applicable or not required or becausethe required information is included elsewhere in the financial statements inthis filing.

 

**3.     Exhibits(listed according to the number assigned in the table in Item 601 of RegulationS-K)**

 

**Exhibit No. 2—Plan ofAcquisition, reorganization, arrangement, liquidation or succession**

 

2(a)Second Amended Plan of Reorganization (Incorporated by reference to Exhibit 2 toCurrent Report on Form 8-K (Registrant No.1-12248) filed with the Commission on December 14, 2000)

 

**Exhibit No.3—Articles of Incorporation and By-laws of the Registrant**

 

3(a)  Certificate of Incorporation of Kaiser Group Holdings, Inc.(Incorporated by reference to Exhibit 3(i) to Current Report on Form 8-K(Registrant No. 1-12248) filed with the Commission on December 14, 2000)

 

3(b)  By-laws of Kaiser Group Holdings, Inc. (Incorporated by referenceto Exhibit 3(ii) to Current Report on Form 8-K (Registrant No. 1-12248) filedwith the Commission on December 14, 2000)

 

**Exhibit No.4—Instruments Defining the Rights of Security Holders, including Indentures**

 

4(a)  Form of Put Agreement relating to preferredstock of Kaiser Group Holdings, Inc. (Incorporated by reference to Exhibit 4 toCurrent Report on Form 8-K (Registrant No. 1-12248) filed with the Commissionon December 14, 2000)

 

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**Exhibit No. 10 —Material Contracts**

 

10(a)  Kaiser Group International, Inc. EmployeeStock Ownership Plan (as amended and restated as of January 1, 1996)  (Incorporated by reference to Exhibit No. 10(b)to Annual Report on Form 10-K (Registrant No. 1-12248) filed with theCommission on April 17, 2000)

 

1.  Amendment No. 1 with theeffective date of January 1, 1998 (Incorporated by reference to Exhibit No. 10(b)(1) to Annual Report onForm 10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)

 

2.  Amendment No. 2 with the effective date ofJanuary 1, 1996  (Incorporated by reference to Exhibit No. 10(b)(2) to Annual Report onForm 10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)

 

3.  Amendment No. 3 dated April19, 1999.  (Incorporated by reference toExhibit No. 10(b)(3) to Annual Report on Form 10-K (Registrant No.1-12248) filed with the Commission on April 17, 2000)

 

4.  Amendment No. 4 dated June25, 1999.  (Incorporated by reference toExhibit No. 10(b)(4) to Annual Report on Form 10-K (RegistrantNo. 1-12248) filed with the Commission on April 17, 2000)

 

10(b)Trust Agreement with Vanguard Fiduciary Trust Company dated as of August 31,1995, for ICF Kaiser International, Inc. Employee Stock Ownership Plan(Incorporated by reference to Exhibit No. 10(c) to Registration Statement onForm S-1 (Registrant No. 33-64655) filed with the Commission on November 30,1995)

 

10(c) ICF Kaiser International,Inc. Retirement Plan (as amended and restated as of March 1, 1993) (and furtheramended with respect to name change only as of June 26, 1993) (Incorporated byreference to Exhibit No. 10(d) to Quarterly Report on Form 10-Q (Registrant No.1-12248) for the second quarter of fiscal 1994 filed with the Commission onOctober 15, 1993)

 

1.  Amendment No. 1 dated April 24, 1995(Incorporated by reference to Exhibit No. 10(d)(1) to Annual Report onForm 10-K (Registrant No. 1- 12248) filed with the Commission on May23, 1995)

 

2.  Amendment No. 2 datedDecember 15, 1995 (Incorporated by reference to Exhibit No. 10(d)(2) toTransition Report on Form 10-K (Registrant No. 1-12248) for thetransition period from March 1, 1995 to December 31, 1995 filed with theCommission on March 29, 1996)

 

3.  Amendment No. 3 dated December 13, 1996(Incorporated by reference to Exhibit No. 10(d)(3) to Registration Statement onForm S-1 (Registrant No. 333-19519) filed with the Commission on January 10,1997)

 

4.  Amendment No. 4 dated April19, 1999 (Incorporated by reference to Exhibit No. 10(d)(4) to Annual Reporton Form 10-K (Registrant No. 1-12248) filed with the Commissionon April 17, 2000)

 

5.  Amendment No. 5 dated June25, 1999 (Incorporated by reference to Exhibit No. 10(d)(5) to Annual Reporton Form 10-K (Registrant No. 1-12248) filed with the Commissionon April 17, 2000)

 

6.  Amendment No. 6 dated August30, 1999 (Incorporated by reference to Exhibit No. 10(d)(6) to Annual Report onForm 10-K (Registrant No. 1-12248) filed with the Commission on April17, 2000)

 

7.  Amendment No. 7 dated April 13, 2000(Incorporated by reference to Exhibit 10(d)(7) on Form 8-K(Registrant No. 1-12248) filed with the Commission on May 2, 2000)

 

8.  Amendment No. 8 dated June 8, 2000(Incorporated by reference to Exhibit 10(d)(8) to Quarterly Report onForm 10-Q (Registrant No. 1-12248) for the second quarter of fiscal 2000filed with the Commission on September 6, 2000)

 

9.  Amendment No. 9 dated June 19, 2003(Incorporated by reference to Exhibit 10(c)(9) to Quarterly Report onForm 10-Q (Registrant No. 1-12248) for the second quarter of fiscal 2003filed with the Commission on August 14, 2003)

 

10(d)Trust Agreement with Vanguard Fiduciary Trust Company dated as of August 31,1995, for ICF Kaiser International, Inc. Retirement Plan (Incorporated byreference to Exhibit No. 10(e) to Registration Statement on Form S-1(Registrant No. 33-64655) filed with the Commission on November 30, 1995)

 

10(e)       ICF Kaiser International, Inc. Section 401(k) Plan (as amendedand restated as of March 1, 1993) (and further amended with respect to namechange only as of June 26, 1993) (Incorporated by reference to Exhibit No.10(f) to Quarterly

 

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Report on Form 10-Q (RegistrantNo. 1-12248) for the second quarter of fiscal 1994 filed with the Commission onOctober 15, 1993)

 

1.  Amendment No. 1 dated April24, 1995 (Incorporated by reference to Exhibit No. 10(p)(1) to Annual Reporton Form 10-K (Registrant No. 1-12248) for fiscal 1995 filed withthe Commission on May 23, 1995)

 

2.  Amendment No. 2 dated December 15, 1995(Incorporated by reference to Exhibit No. 10(p)(2) to Transition Report onForm 10-K (Registrant No. 1-12248) for the transition period from March 1,1995 to December 31, 1995 filed with the Commission on March 29, 1996)

 

3.  Amendment No. 3 datedDecember 13, 1996 (Incorporated by reference to Exhibit No. 10(q)(3) toRegistration Statement on Form S-1 (Registrant No. 333-19519) filed with theCommission on January 10, 1997)

 

4.  Amendment No. 4 dated April8, 1999 (Incorporated by reference to Exhibit No. 10(k)(4) to Annual Report onForm 10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)

 

5.  Amendment No. 5 dated June25, 1999 (Incorporated by reference to Exhibit No. 10(k)(5) to Annual Reporton Form 10-K (Registrant No. 1-12248) filed with the Commissionon April 17, 2000)

 

6.  Amendment No. 6 dated April 13, 2000(Incorporated by reference to Exhibit 10(k)(6) on Form 8-K (Registrant No. 1-12248) filedwith the Commission on May 2, 2000)

 

7.  Amendment dated January 1, 2001(Incorporated by reference to Exhibit No. 10(m)(7) to Annual Report on Form10-K (Registrant No. 1-2248) filed with the Commission on March 30, 2001)

 

8.  Amendment No. 8 dated December 10, 2002(Incorporated by reference to Exhibit 10(e)(8) to Quarterly Report onForm 10-Q (Registrant No. 1-12248) for the second quarter of fiscal 2003filed with the Commission on August 14, 2003)

 

9.  Amendment No. 9 dated June 19, 2003(Incorporated by reference to Exhibit 10(e)(9) to Quarterly Report on Form 10-Q(Registrant No. 1-12248) for the second quarter of fiscal 2003 filed with theCommission on August 14, 2003)

 

10(f)  Trust Agreement with Vanguard FiduciaryTrust Company dated as of March 1, 1989, for the ICF Kaiser International, Inc.Section 401(k) Plan (Incorporated by reference to Exhibit No. 28(b) toRegistration Statement on Form S-8 (Registrant No. 33-51460) filed with theCommission on August 31, 1992)

 

10(g)Contract between Kaiser-Hill Company, LLC and the U.S. Department of Energydated January 24, 2000 (Incorporated by reference to Exhibit No. 10(o) toAnnual Report on Form 10-K (Registrant No. 1-12248) filed with the Commissionon April 17, 2000)

 

1. ModificationM116 to Contract #DE-AC34-00RF01904, effective March 24, 200410(h)  Assignment of Membership Interestin Hunters Branch Leasing, LLC by and between Kaiser Holdings Unlimited, Inc. (Assignor) and Nutley Partners, LC (Assignee),dated January 1, 2001 (Incorporated by reference to Exhibit No. 10(r) toAnnual Report on Form 10-K (Registrant No. 1-12248) filed with the Commissionon April 2, 2001)

 

**Exhibit No.10—Material Contracts (management contracts, compensatory plans, orarrangements)**

 

10(i)  Kaiser Group Holdings, Inc. 2002 Equity Compensation Plan, asamended (Incorporated by reference to Exhibit No. 10 to Registration Statementon Form S-8 (Registration No. 333-107912) filed with the Commission on August13, 2003)

 

10(j)  Amended and Restated Employment Agreementwith John T. Grigsby, Jr., President and Chief Executive Officer, effective asof December 19, 2000 (Incorporated by reference to Exhibit No. 10(m) toRegistration Statement on Form S-4 (Registrant No. 333-100640) filed with the Commissionon October 18, 2002)

 

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**Exhibit 14 —Corporate Code of Conduct**

 

14(a)  Kaiser Group Holdings, Inc. Corporate Codeof Conduct (Incorporated by reference to Exhibit 14.1 to CurrentReport on Form 8-K (Registrant No. 1-12248) filed with the Commission onJanuary 13, 2004)

 

**Exhibit No. 21 —Consolidated Subsidiaries of the Registrant as of March 1, 2004**

 

**Exhibit 23 — Consentof Independent Accountants**

 

**Exhibit No. 31.1 —Certification of the Principal Executive Officer**

 

Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the SecuritiesExchange Act of 1934

 

**Exhibit No. 31.2 —Certification of the Principal Financial Officer**

 

Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the SecuritiesExchange Act of 1934

 

**Exhibit No. 32.1 —Certification of the Principal Executive Officer**

 

Pursuant to Rule 13a-14(b) and Rule 15d-14(b), Section 1350, Chapter 63of Title 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002

 

**Exhibit No. 32.2 —Certification of the Principal Financial Officer**

 

Pursuant to Rule 13a-14(b) and Rule 15d-14(b), Section 1350, Chapter 63of Title 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002

 

**(b) Reports on Form8-K**

 

On July17, 2003, the Company filed a Current Report on Form 8-K.  Pursuant to Item 5 of its Report, theCompany disclosed that it had relocated its principal office from Fairfax,Virginia to Broomfield, Colorado effective as of June 1, 2003.

 

On August7, 2003, the Company filed a Current Report on Form 8-K for the purpose ofdescribing its capital stock.

 

OnJanuary 13, 2004, the Company filed a Current Report on Form 8-K.  Pursuant to Item 5 of its Report, theCompany announced plans for a preferred stock redemption of its Series 1Redeemable Cumulative Preferred Stock with a redemption date of February 16,2004.  The Company also announced thatit will hold its annual meeting of shareholders on Wednesday, May 5, 2004.

 

OnJanuary 26, 2004, the Company filed a Current Report on Form 8-K.  Pursuant to Item 5 of its Report, theCompany announced that on January 20, 2004, the United States Bankruptcy Courtfor the District of Delaware rendered a decision in claim litigation involvingKaiser Group Holdings, Inc. and a class comprised of former holders of sharesof ICT Spectrum Constructors, Inc.

 

21

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this Annual Report on Form 10-K to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|   | KAISER GROUP  HOLDINGS, INC.                       |
|--------|----------------------------------------------------|
|   |                                               |
|   |                                               |
|   | By:                                                | /s/ John T.  Grigsby, Jr. |   |
|   | Name:  John T. Grigsby, Jr.                   |
|   | Title:  President and Chief Executive Officer |

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this Annual Reporton Form 10-K has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated.

 

 

(1)  Principal executive officer

 

 
|   | /s/ John T. Grigsby, Jr. |                        |   | March 30, 2004 |
|--------|--------------------------|-----------------------------|--------|----------------|
|   | John T. Grigsby, Jr.     | President                   |   |
|   |                     | and Chief Executive Officer |   |

 

 

(2)Principal financial and accounting officer

 

 
|   | /s/ Marijo L. Ahlgrimm |                      |   | March 30, 2004 |
|--------|------------------------|---------------------------|--------|----------------|
|   | Marijo L. Ahlgrimm     | Executive Vice President, |   |
|   |                   | Chief Financial Officer,  |   |
|   |                   | and Assistant Treasurer   |   |

 

 

(3)  Board of Directors

 

 
|   | /s/ Jon B. Bennett         |     |   | March 30, 2004 |
|--------|----------------------------|----------|--------|----------------|
|   | Jon B. Bennett             | Director |   |
|   |                       |     |   |
|   | /s/ John T. Grigsby, Jr.   |     |   | March 30, 2004 |
|   | John T. Grigsby, Jr.       | Director |   |
|   |                       |     |   |
|   | /s/ James J. Maiwurm       |     |   | March 30, 2004 |
|   | James J. Maiwurm           | Director |   |
|   |                       |     |   |
|   | /s/ Frank E. Williams, Jr. |     |   | March 30, 2004 |
|   | Frank E. Williams, Jr.     | Director |   |

 

22

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### **Reportof Independent Auditors**

 

To Board of Directors and

  Shareholders of Kaiser Group Holdings, Inc.:

 

In our opinion, theaccompanying consolidated financial statements present fairly, in all materialrespects, the financial position of Kaiser Group Holdings, Inc. and itssubsidiaries at December 31, 2003 and December 31, 2002, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2003 in conformity with accounting principles generallyaccepted in the United States of America. These financial statements are the responsibility of the Company’smanagement; our responsibility is to express an opinion on these financialstatements based on our audits.  Weconducted our audits of these statements in accordance with auditing standardsgenerally accepted in the United States of America, which require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

 

PricewaterhouseCoopers LLP

March 24, 2004

 

F-1

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**KAISERGROUP HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(Inthousands, except share amounts)**

 
|                                                                                                                 |   | **December  31,  2003** |       | **December  31,  2002** |       |
|----------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                           |   |                    |       |                    |       |
| Current Assets                                                                                                       |   |                    |       |                    |       |
| Cash and cash equivalents                                                                                            |   | $                       | 10,971     |                    | $          | 17,413 |   |
| Restricted cash and cash equivalents                                                                                 |   | 7,049                   |       | 18,679                  |       |
| Prepaid expenses and other current assets                                                                            |   | 971                     |       | 2,404                   |       |
| Net assets of discontinued operations                                                                                |   | 3,000                   |       | 6,000                   |       |
| Total Current Assets                                                                                                 |   | 21,991                  |       | 44,496                  |       |
|                                                                                                                 |   |                    |       |                    |       |
| Other Assets                                                                                                         |   |                    |       |                    |       |
| Investments in and advances to affiliates                                                                            |   | 45,788                  |       | 45,663                  |       |
| Notes receivable                                                                                                     |   | 5,894                   |       | 5,894                   |       |
| Other long-term assets                                                                                               |   | 227                     |       | 142                     |       |
|                                                                                                                 |   | 51,909                  |       | 51,699                  |       |
| Total Assets                                                                                                         |   | $                       | 73,900     |                    | $          | 96,195 |   |
|                                                                                                                 |   |                    | ** ** |                    | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                        |   |                    | ** ** |                    | ** ** |
|                                                                                                                 |   |                    |       |                    |       |
| Current Liabilities                                                                                                  |   |                    |       |                    |       |
| Accounts payable                                                                                                     |   | $                       | 304        |                    | $          | 922 |   |
| Post retirement benefit plan obligation                                                                              |   | 6,913                   |       | 7,193                   |       |
| Other accrued expenses                                                                                               |   | 4,252                   |       | 6,501                   |       |
| Preferred stock dividend payable                                                                                     |   | —                  |       | 654                     |       |
| Interest payable on preferred stock                                                                                  |   | 409                     |       | —                  |       |
| Deferred tax liability                                                                                               |   | 6,495                   |       | 6,538                   |       |
| Income taxes payable                                                                                                 |   | 275                     |       | 640                     |       |
| Total Current Liabilities                                                                                            |   | 18,648                  |       | 22,448                  |       |
|                                                                                                                 |   |                    |       |                    |       |
| Long Term Liabilities                                                                                                |   |                    |       |                    |       |
| Mandatorily redeemable preferred stock                                                                               |   | 35,175                  |       | —                  |       |
|                                                                                                                 |   |                    |       |                    |       |
| Commitments and Contingencies                                                                                        |   |                    |       |                    |       |
|                                                                                                                 |   |                    |       |                    |       |
| Preferred stock, par value $.01 per share                                                                            |   | —                  |       | 55,942                  |       |
|                                                                                                                 |   |                    |       |                    |       |
| Common stock, par value $.01 per share:                                                                              |   |                    |       |                    |       |
| Authorized—3,000,000 shares                                                                                     |   |                    |       |                    |       |
| Issued and outstanding—1,594,270 and  1,590,062 shares at December 31, 2003 and December 31, 2002, respectively |   | 16                      |       | 16                      |       |
| Capital in excess of par                                                                                             |   | 7,975                   |       | 8,606                   |       |
| Retained earnings                                                                                                    |   | 12,049                  |       | 9,215                   |       |
| Accumulated other comprehensive income  (loss)                                                                       |   | 37                      |       | (32                     | )          |
| Total Shareholders’ Equity                                                                                      |   | 20,077                  |       | 17,805                  |       |
| Total Liabilities and Shareholders’ Equity                                                                      |   | $                       | 73,900     |                    | $          | 96,195 |   |

 

See notes to consolidatedfinancial statements.

 

F-2

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**KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 

 
|                                                                                                                                 |   | **Year Ended  December 31,**                  |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                                                                                                 |   | **2003**                                      |   | **2002** |   | **2001** |   |
|                                                                                                                                 |   | **(In  thousands, except per share amounts)** |   |
|                                                                                                                                 |   |                                          |   |   |   |   |   |
| Gross Revenue                                                                                                                        |   | —                                        |   | — |   | — |   |
| Subcontract and direct material costs                                                                                                |   | —                                        |   | — |   | — |   |
| Service Revenue                                                                                                                      |   | —                                        |   | — |   | — |   |
| Operating Expenses                                                                                                                   |   |                                          |   |   |   |   |   |
| Administrative expenses                                                                                                              |   | 4,918                                         |   | 7,028 |   | 9,692 |   |
| Impairment charge                                                                                                                    |   | —                                        |   | — |   | 1,100 |   |
| Operating Income (Loss)                                                                                                              |   | (4,918                                        | )      | (7,028 | ) | (10,792 | ) |
| Other Income (Expense)                                                                                                               |   |                                          |   |   |   |   |   |
| Equity income in earnings of affiliate, net  of amortization of $3,524 for each of the years ended December 31, 2003, 2002  and 2001 |   | 16,475                                        |   | 33,233 |   | 11,518 |   |
| Gain on stock demutualization                                                                                                        |   | —                                        |   | — |   | 5,856 |   |
| Gain on sale of investment                                                                                                           |   | —                                        |   | 3,371 |   | — |   |
| Gain on sale of security                                                                                                             |   | —                                        |   | 106 |   | — |   |
| Write-off of notes receivable and accrued  interest                                                                                  |   | —                                        |   | (1,320 | ) | — |   |
| Interest income                                                                                                                      |   | 833                                           |   | 803 |   | 1,075 |   |
| Interest expense for preferred dividends                                                                                             |   | (1,362                                        | )      | — |   | — |   |
| Income From Continuing Operations Before  Income Tax                                                                                 |   | 11,028                                        |   | 29,165 |   | 7,657 |   |
| Income tax (expense)                                                                                                                 |   | (4,827                                        | )      | (11,319 | ) | (2,417 | ) |
| Income From Continuing Operations                                                                                                    |   | 6,201                                         |   | 17,846 |   | 5,240 |   |
| Income   (Loss) from discontinued operations, net of tax                                                                        |   | (1,833                                        | )      | 497 |   | (10,197 | ) |
| Net Income (Loss)                                                                                                                    |   | 4,368                                         |   | 18,343 |   | (4,957 | ) |
| Preferred stock dividends                                                                                                            |   | (1,534                                        | )      | (4,171 | ) | (3,091 | ) |
|                                                                                                                                 |   |                                          |   |   |   |   |   |
| Income (Loss) Applicable to Common  Shareholders                                                                                     |   | $                                             | 2,834  |   | $ | 14,172 |   | $ | (8,048 | ) |
|                                                                                                                                 |   |                                          |   |   |   |   |   |
| Basic and Diluted Earnings (Loss) Per  Common Share:                                                                                 |   |                                          |   |   |   |   |   |
| Continuing operations, net of tax                                                                                                    |   | $                                             | 2.92   |   | $ | 8.60 |   | $ | 1.92 |   |
| Discontinued operations, net of tax                                                                                                  |   | (1.14                                         | )      | 0.31 |   | (9.11 | ) |
| Net Earnings (Loss) Per Share                                                                                                        |   | $                                             | 1.78   |   | $ | 8.91 |   | $ | (7.19 | ) |
|                                                                                                                                 |   |                                          |   |   |   |   |   |
| Weighted average shares for basic and  diluted earnings (loss) per common share                                                      |   | 1,594                                         |   | 1,590 |   | 1,119 |   |

 

See notes to consolidated financialstatements.

 

F-3

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**KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF SHAREHOLDERS’EQUITY (DEFICIT)**

(In thousands, except shareamounts)

 
|                                                                  |   | **Old Common Stock** |   | **New Common Stock** |   | **Capital In  Excess of Par** |      | **Accumulated  Earnings  (Deficit)** |   | **Accumulated  Other  Comprehensive** |   |
|-----------------------------------------------------------------------|--------|----------------------|--------|----------------------|--------|-------------------------------|-----------|--------------------------------------|--------|---------------------------------------|--------|
|                                                                  |   | **Shares**           |   | **Par  Value**       |   | **Shares**                    |      | **Par Value**                        |   |                                  |   |   |
|                                                                  |   |                 |   |                 |   |                          |      |                                 |   |                                  |   |   |   |   |   |
| Successor Company                                                     |   |                 |   |                 |   |                          |      |                                 |   |                                  |   |   |   |   |   |
| Balance, December 31, 2000                                            |   | 23,414,328           |   | 234                  |   | —                        |      | —                               |   | 87,266                                |   | — |   | — |   |
| Net loss                                                              |   | —               |   | —               |   | —                        |      | —                               |   | —                                |   | (4,957 | ) | — |   |
| Issuances of new common stock                                         |   | —               |   | —               |   | 1,610,889                     |      | 16                                   |   | (16                                   | )      | — |   | — |   |
| Cancellation of old common  Stock                                     |   | (23,414,328          | )      | (234                 | )      | —                        |      | —                               |   | 234                                   |   | — |   | — |   |
| Issuance of preferred stock                                           |   | —               |   | —               |   | —                        |      | —                               |   | (62,481                               | )      | — |   | — |   |
| Foreign currency translation  Adjustment                              |   | —               |   | —               |   | —                        |      | —                               |   | —                                |   | — |   | (39 | ) |
| Unrealized gain on securities  Available for sale                     |   | —               |   | —               |   | —                        |      | —                               |   | —                                |   | — |   | 393 |   |
| Preferred stock dividends                                             |   | —               |   | —               |   | —                        |      | —                               |   | (3,091                                | )      | — |   | — |   |
| Cash buy back of new common  Stock                                    |   | —               |   | —               |   | (25,650                       | )         | —                               |   | (125                                  | )      | — |   | — |   |
| Class 4 allowed claim  settlements                                    |   | —               |   | —               |   | —                        |      | —                               |   | (13,840                               | )      | — |   | — |   |
|                                                                  |   |                 |   |                 |   |                          |      |                                 |   |                                  |   |   |   |   |   |
| Balance, December 31, 2001                                            |   | —               |   | $                    | — |                          | 1,585,239 |                                 | $      | 16                                    |   | $ | 7,947 |   | $ | (4,957 | ) | $ | 354 |   |
| Net income                                                            |   | —               |   | —               |   | —                        |      | —                               |   | —                                |   | 18,343 |   | — |   |
| Issuances of new common stock                                         |   | —               |   | —               |   | 4,823                         |      | —                               |   | 10                                    |   | — |   | — |   |
| Issuance of preferred stock in  settlement of allowed class 4  claims |   | —               |   | —               |   | —                        |      | —                               |   | (38                                   | )      | — |   | — |   |
| Foreign currency translation  Adjustment                              |   | —               |   | —               |   | —                        |      | —                               |   | —                                |   | — |   | 7 |   |
| Unrealized gain on securities  Available for sale                     |   | —               |   | —               |   | —                        |      | —                               |   | —                                |   | — |   | (393 | ) |
| Preferred stock dividends                                             |   | —               |   | —               |   | —                        |      | —                               |   | —                                |   | (4,171 | ) | — |   |
| Purchase of preferred treasury  stock below liquidation value         |   | —               |   | —               |   | —                        |      | —                               |   | 2,594                                 |   | — |   | — |   |
| Class 4 allowed claim  settlements                                    |   | —               |   | —               |   | —                        |      | —                               |   | (291                                  | )      | — |   | — |   |
| Tax adjustment                                                        |   | —               |   | —               |   | —                        |      | —                               |   | (1,616                                | )      | — |   | — |   |
|                                                                  |   |                 |   |                 |   |                          |      |                                 |   |                                  |   |   |   |   |   |
| Balance, December 31, 2002                                            |   | —               |   | $                    | — |                          | 1,590,062 |                                 | $      | 16                                    |   | $ | 8,606 |   | $ | 9,215 |   | $ | (32 | ) |
| Net income                                                            |   | —               |   | —               |   | —                        |      | —                               |   | —                                |   | 4,368 |   | — |   |
| Issuances of new common stock                                         |   | —               |   | —               |   | 4,208                         |      | —                               |   | 22                                    |   | — |   | — |   |
| Foreign currency translation  Adjustment                              |   | —               |   | —               |   | —                        |      | —                               |   | —                                |   | — |   | 69 |   |
| Preferred stock dividends                                             |   | —               |   | —               |   | —                        |      | —                               |   | —                                |   | (1,534 | ) | — |   |
| Purchase of preferred treasury  stock below liquidation value         |   | —               |   | —               |   | —                        |      | —                               |   | 65                                    |   | — |   | — |   |
| Class 4 allowed claim  settlements                                    |   | —               |   | —               |   | —                        |      | —                               |   | (1,158                                | )      | — |   | — |   |
| Tax adjustment                                                        |   | —               |   | —               |   | —                        |      | —                               |   | 440                                   |   | — |   | — |   |
|                                                                  |   |                 |   |                 |   |                          |      |                                 |   |                                  |   |   |   |   |   |
| Balance, December 31, 2003                                            |   | —               |   | $                    | — |                          | 1,594,270 |                                 | $      | 16                                    |   | $ | 7,975 |   | $ | 12,049 |   | $ | 37 |   |

 

**KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVEINCOME (LOSS)**

(In thousands)

 
|                                       |   | **Year Ended December 31,** |   |
|--------------------------------------------|--------|-----------------------------|--------|
|                                       |   | **2003**                    |   | **2002** | ** ** | **2001** | ** ** |
| Net Income (Loss)                          |   | $                           | 4,368  |   | $ | 18,343 |   | $ | (4,957 | ) |
| Other Comprehensive Income  (Loss)         |   |                        |   |   |   |   |   |
| Foreign currency translation  adjustments  |   | 69                          |   | 7 |   | (39 | ) |
| Unrealized gain on securities,  net of tax |   | —                      |   | (393 | ) | 393 |   |
|                                       |   |                        |   |   |   |   |   |
| Total Comprehensive Income  (Loss)         |   | $                           | 4,437  |   | $ | 17,957 |   | $ | (4,603 | ) |

 

See notes to consolidated financialstatements.

 

F-4

----

 

##### **KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                                              |   | **For the  year ended December 31,** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                                              |   | **2003**                             |   | **2002** |   | **2001** |   |
|                                                                                                              |   |                                 |   | **(in  thousands)** |   |   |   |
| Operating Activities                                                                                              |   |                                 |   |   |   |   |   |
| Net income (loss)                                                                                                 |   | $                                    | 4,368  |   | $ | 18,343 |   | $ | (4,957 | ) |
| Adjustments to reconcile net income (loss)  to net cash Used in operating activities:                             |   |                                 |   |   |   |   |   |
| Loss of discontinued operations, net of tax                                                                       |   | 1,833                                |   | 259 |   | 10,197 |   |
| Gain on sale of investments                                                                                       |   | —                               |   | (3,371 | ) | — |   |
| Deferred taxes related to continuing  operating activities                                                        |   | 1,518                                |   | 10,746 |   | 1,312 |   |
| Gain on stock demutualization                                                                                     |   | —                               |   | — |   | (5,856 | ) |
| Impairment charge                                                                                                 |   | —                               |   | — |   | 1,100 |   |
| Gain on sale of stock                                                                                             |   | —                               |   | (106 | ) | — |   |
| Equity in unconsolidated affiliate                                                                                |   | (16,475                              | )      | (33,233 | ) | (11,518 | ) |
| Changes in operating assets and  liabilities, net of acquisitions and dispositions                                |   |                                 |   |   |   |   |   |
| Contract receivables, net                                                                                         |   | —                               |   | — |   | 1,692 |   |
| Prepaid expenses and other current assets                                                                         |   | 1,433                                |   | (561 | ) | 1,018 |   |
| Accounts payable and accrued expenses                                                                             |   | (2,738                               | )      | 1,926 |   | (5,909 | ) |
| Income taxes payable                                                                                              |   | (365                                 | )      | (498 | ) | 1,035 |   |
| Other operating activities                                                                                        |   | 16                                   |   | 232 |   | (831 | ) |
| Net cash provided by (used in) continuing  operating activities before Claims resolution and reorganization items |   | (10,410                              | )      | (6,263 | ) | (12,717 | ) |
| Distributions to allowed class 3 claim  holders                                                                   |   | —                               |   | — |   | (600 | ) |
| Net Cash Used in Continuing Operating  Activities                                                                 |   | (10,410                              | )      | (6,263 | ) | (13,317 | ) |
| Investing Activities                                                                                              |   |                                 |   |   |   |   |   |
| Distributions from 50% owned affiliate                                                                            |   | 16,350                               |   | 15,650 |   | 7,900 |   |
| Proceeds from sale of investment                                                                                  |   | —                               |   | 4,521 |   | — |   |
| Proceeds from sale of securities                                                                                  |   | —                               |   | 5,961 |   | — |   |
| Net Cash Provided by Investing Activities                                                                         |   | 16,350                               |   | 26,132 |   | 7,900 |   |
| Financing Activities                                                                                              |   |                                 |   |   |   |   |   |
| Release of restricted cash                                                                                        |   | —                               |   | 1,435 |   | 802 |   |
| Transfer to restricted cash                                                                                       |   | —                               |   | (4,508 | ) | — |   |
| Purchase of preferred treasury stock                                                                              |   | (311                                 | )      | (3,983 | ) | — |   |
| Transfer from restricted cash for the  redemption of preferred stock                                              |   | 10,507                               |   | — |   | — |   |
| Redemption of preferred stock                                                                                     |   | (20,390                              | )      | — |   | — |   |
| Establishment of cash reserve for  unresolved claims                                                              |   | —                               |   | — |   | (12,331 | ) |
| Distribution to allowed class 4 claim  holders                                                                    |   | —                               |   | — |   | (13,065 | ) |
| Repurchase of New Common stock pursuant to  buy back                                                              |   | —                               |   | — |   | (125 | ) |
| Payment of preferred stock dividends                                                                              |   | (2,188                               | )      | (4,248 | ) | (2,360 | ) |
| Net Cash Used in Financing Activities.                                                                            |   | (12,382                              | )      | (11,304 | ) | (27,079 | ) |
| Increase (Decrease) in Cash and Cash  Equivalents                                                                 |   | (6,442                               | )      | 8,565 |   | (32,496 | ) |
| Cash and Cash Equivalents at Beginning of  Period                                                                 |   | 17,413                               |   | 8,848 |   | 41,344 |   |
|                                                                                                              |   |                                 |   |   |   |   |   |
| Cash and Cash Equivalents at End of Period.                                                                       |   | $                                    | 10,971 |   | $ | 17,413 |   | $ | 8,848 |   |

 

See notes to consolidated financialstatements.

 

F-5

----

 

**KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMEN****TS**

 

1.             Basisof Presentation

 

Kaiser Group Holdings,Inc. is a Delaware holding company that was formed on December 6, 2000 for thepurpose of owning all of the outstanding stock of Kaiser Group International,Inc. (Old Kaiser), which in turn continues to own the stock of its remainingsubsidiaries. On June 9, 2000, Old Kaiser and 38 of its domestic subsidiariesvoluntarily filed for protection under Chapter 11 of the United StatesBankruptcy Code in the District of Delaware (case nos. 00-2263 to 00-2301). OldKaiser emerged from bankruptcy with an approved plan of reorganization (theSecond Amended Plan of Reorganization (the Plan)) that was effective onDecember 18, 2000 (the Effective Date). The Company is deemed a “successorissuer” to Old Kaiser by virtue of Rule 12g-3(a) under the Securities ExchangeAct of 1934. References to the “Company” or “Kaiser Holdings” in this reportrefer to Kaiser Group Holdings, Inc. and its consolidated subsidiaries. Asummary of the Plan for Old Kaiser can be found in a Current Report on Form 8-Kdated December 5, 2000 filed by Old Kaiser.

 

Currently, apart from resolving remaining bankruptcy claims, the Company has only a limited number ofactivities, assets and liabilities, primarily consisting of:

 

•                  theownership of a 50% interest in Kaiser-Hill Company, LLC (Kaiser-Hill), whichserves as the general contractor at the U.S. Department of Energy’s Rocky FlatsEnvironmental Technology Site near Denver, Colorado, for the performance of acontract for the closure of the site (the Closure Contract). (See Note 6 forsummarized financial information.)

•                  the closeout andresolution of a completed contract for the engineering and construction of asteel mini-mill for Nova Hut in the Czech Republic (Nova Hut project).

•                  the holding ofan interest-bearing promissory note from ICF Consulting Group, Inc. (ICFConsulting), a division that Old Kaiser sold in 1999.

•                  a wholly-ownedcaptive insurance company that is not at this time issuing new policies and issimply involved in resolving remaining claims.

•                  an ongoingobligation to fund a capped, post-employment medical benefit plan for a fixedgroup of retirees.

 

The Company adopted fresh startreporting in its consolidated balance sheet as of December 31, 2000. TheAmerican Institute of Certified Public Accountants’ Statement of Position 90-7,“Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”(SOP 90-7), requires that under certain circumstances resulting from abankruptcy, a new entity is created for financial reporting purposes upon theemergence of that entity from bankruptcy. Accordingly, the value of the reorganized enterprise becomes theestablished amount for the emerging balance of shareholders’ equity, and anyaccumulated deficit of the predecessor entity is offset against availablepaid-in-capital to result in an emerging retained earnings of zero.  Additionally, assets and liabilities arerecorded at their fair values.

 

Thevalue of the emerged enterprise used for fresh start reporting as of December31, 2000 was $87.5 million and was determined by management with the assistanceof independent advisors.  Themethodology employed involved estimation of the enterprise value taking intoconsideration a discounted cash flow analysis. The discounted cash flow analysis was based on a seven-year cash flowprojection prepared by management, taking into consideration the terminal valueof its assets and liabilities as of immediately prior to its emergence frombankruptcy on December 18, 2000. Terminal values of assets and liabilities were determined based eitheron contracted amounts, actuarial present values and/or management’s estimatesof the outcome of certain operating activities. Net after-tax cash flows,assuming a 40% effective tax rate, were discounted at 17% in order to take intoconsideration the risks and uncertainties inherent in such projections.  The cash flow projections were based onestimates and assumptions about circumstances and events that had not yet takenplace.  Estimates and assumptionsregarding individual retained matters which form the collective composition ofthe overall enterprise value as of December 18, 2000 are inherently subject tosignificant economic and competitive uncertainties and contingencies beyond thecontrol of the Company.  Accordingly,there may be differences between projections and actual results because eventsand circumstances frequently do not occur as expected and may besignificant.  More specifically,assumptions within the valuation related to the amount and timing of theultimate performance and related cash flows of the Company’s investment inKaiser-Hill have the greatest impact on the overall enterprise valuation.

 

2.             General Terms of Plan and Status ofBankruptcy Distributions

 

The effectiveness of theOld Kaiser Plan of Reorganization as of December 18, 2000 did not, in and ofitself, complete the bankruptcy process. The process of resolving in excess of$500 million of claims initially filed in the bankruptcy is ongoing.

 

F-6

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Old Kaiser objected tothe majority of the unresolved claims, and if such claims are not settled viathe objection or dispute resolution processes or other means, they willultimately be heard and determined by the Bankruptcy Court. Once a claim isresolved with an amount due to the creditor, such portion of the claim isdeemed to be an allowed claim by the Bankruptcy Court (an allowed claim). TheCompany cannot predict with accuracy when the claims resolution process will becomplete or what the total amount of allowed claims will be upon completion.

 

In general terms, thePlan contemplated three basic classes of creditors:

 

•                  Allowed “Class 3claims” against the Old Kaiser bankruptcy estate generally consisted of tradeand similar creditors’ claims of $20,000 or less.  Holders of allowed Class 3 claims received cash for their claims.

 

•                  Allowed “Class 4claims”, the largest class of claims against the Old Kaiser bankruptcy estate,is made up of creditor claims other than Class 3 claims and equity claims.Class 4 claims included holders of Old Kaiser senior subordinated notes due2003 (Old Subordinated Notes). Holders of allowed Class 4 claims received acombination of cash and Kaiser Holdings preferred and common stock in respectof their claims. Such holders received one share of Kaiser Holdings’ preferredstock (New Preferred) and one share of Kaiser Holdings’ common stock (NewCommon) for each $100 of claims. However, the number of shares of New Preferredissued was reduced by one share for each $55.00 of cash received by the holderof an allowed Class 4 claim.

 

•                  The third classof claims recognized in the Old Kaiser bankruptcy are equity claims, consistingof holders of Old Kaiser common stock (Old Common) and other “Equity Interests”as defined in the Plan. Under the Plan, holders of Equity Interests willreceive a number of shares of New Common equal to 17.65% of the number ofshares of such common stock issued to holders of allowed Class 4 Claims. In theinitial distribution, one share of New Common was issued for each 96 shares ofpreviously outstanding Old Common. Additional distributions of New Common maybe made in the future as additional shares of New Common are issued to holdersof newly allowed Class 4 claims, if any. Apart from holders of Old Common, theonly holders of Equity Interests of which the Company is aware are the formershareholders of ICT Spectrum Constructors, Inc., a corporation acquired bymerger with a subsidiary of Old Kaiser in 1998. The Bankruptcy Court confirmedthe equity nature of those claims.  SeeNote 14 below for information concerning a recent Bankruptcy Court ruling withrespect to these claims.

 

Pursuant to the terms ofOld Kaiser’s Plan, the Company was required to complete its initial bankruptcydistribution within 120 days of the effective date of the Plan.  Accordingly, on April 17, 2001, the Companyeffected its initial distribution.  Atthat time, there were approximately $136.8 million of Class 4 claims that hadbeen allowed in the bankruptcy process. The amount of unresolved claims remaining at April 17, 2001 wasapproximately $130.5 million.

 

To address the remainingunresolved claims, the Bankruptcy Court issued an order on March 27, 2001establishing an Alternative Dispute Resolution (ADR) procedure whereby theremaining claimants and Old Kaiser produce limited supporting data relative totheir respective positions and engage in initial negotiation efforts in anattempt to reach an agreed claim determination.  If necessary, the parties were thereafter required to participatein a non-binding mediation before a mediator pre-selected by the BankruptcyCourt.  All unresolved claims as ofMarch 27, 2001 are subject to the ADR process. Since April 17, 2001, the dateof the initial distribution, $123.0 million of asserted claims have beenwithdrawn, negotiated or mediated to an agreed amount, resulting in cashpayments approximating $2.2 million and issuances of 683 shares of NewPreferred and 823 shares of New Common. As of March 26, 2004, the amount ofunresolved claims was approximately $7.5 million. The Company expects toresolve the remaining claims in the first half of 2004.  The Company currently believes that thetotal amount of Class 4 claims ultimately to be allowed in the Old Kaiserbankruptcy proceeding will not exceed $142.5 million.  As demonstrated by the claim settlements completed since April17, 2001, and based on the belief that it is in the best interest of theCompany and its current shareholders, the Company has been settling certainremaining Class 4 claims entirely for cash payments in lieu of the combinationof cash and New Preferred and New Common as contemplated in the Plan.  The Company intends to continue to use thissettlement alternative during the resolution of remaining Class 4 claims.

 

From time to time in thefuture, as remaining unresolved claims are resolved, excess cash from the“reserve” fund (including cash added to “reserve” fund in payment of pro formadividends, classified as interest expense subsequent to July 1, 2003, onretained shares of New Preferred) must be used to redeem outstanding shares ofNew Preferred.  In January 2003, theCompany redeemed 282,000 shares of outstanding New Preferred by using $8.9 millionand $5.2 million of restricted and unrestricted cash, respectively.  In October 2003, the Company redeemed113,530 shares of outstanding New Preferred by using $1.6 million and $4.6million of restricted and unrestricted cash, respectively.  In February 2004, the Company redeemed95,932 shares of New Preferred by using $3.2 million of restricted cash and$2.1 million of unrestricted cash.

 

F-7

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3.             SignificantAccounting Policies

 

**Principles of Consolidation: Theconsolidated financial statements include all majority-owned or controlledsubsidiaries. Investments in unconsolidated affiliated companies and jointventures are accounted for using the equity method. The difference between thecarrying value of the joint venture investment and the Company’s underlyingequity is amortized on a straight-line basis over the estimated term of thejoint venture investment. All significant intercompany balances andtransactions have been eliminated.**

 

Income Taxes: Deferred tax assets andliabilities represent the tax effects of differences between the financialstatement carrying amounts and the tax bases carrying amounts of the Company’sassets and liabilities. These differences are calculated based upon thestatutory tax rates in effect in the years in which the differences areexpected to reverse. The effect of subsequent changes in tax rates on deferredtax balances is recognized in the period in which a tax rate change is enacted.The Company evaluates its ability to realize future benefit from all deferredtax assets and establishes valuation allowances for amounts that may not berealizable.

 

Earnings Per Share:  Basic EPS is computed by dividing net income (loss) by theweighted average number of common shares outstanding for the period.  The weighted average shares outstanding forthe year ended December 31, 2001 retroactively adjusts for the conversion ofthe Old Common to New Common effective with the adoption of fresh-startreporting.  As additional distributionsof Kaiser Holdings common stock are made to holders of newly allowed Class 4claims, the conversion ratio of 96 shares may be adjusted to reflect the finaltotal number of shares of New Common (as discussed in Note 2).

 

Diluted EPS normally includes theweighted-average effect of dilutive securities outstanding during theperiod.  Pursuant to the Plan that waseffective as of December 18, 2000, all then outstanding common stockequivalents were cancelled.  Accordingly,no anti-dilutive information is presented herein.

 

The effect of preferred dividends of $1.5million, $4.2 million and $3.1 million has been included in continuingoperations in the calculation of basic and diluted earnings per share for theyear ended December 31, 2003, 2002 and 2001, respectively. As discussed in Note8, the Company adopted FAS 150 effective July 1, 2003.  Therefore, the $1.4 million of preferredstock dividends for the six months ended and December 31, 2003 have been shownas interest expense.

 

Foreign Currency Translation:  Results of operations for foreign entitiesare translated using the average exchange rates during the period. Assets andliabilities are translated to U.S. dollars using the exchange rate in effect atthe balance sheet date. Resulting translation adjustments are reflected net oftax in shareholders’ equity as cumulative translation adjustments.

 

Cash Equivalents and Restricted Cash: TheCompany considers all highly liquid financial instruments purchased withmaturities of three months or less at date of purchase to be cash equivalents.Restricted cash balances consisted of the following at December 31 (inthousands):

 
|                                                                  |   | **2003** |   | **2002** |   |
|-----------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Letters of credit  collateralized by cash                             |   | $        | — |     | $      | — |   |
| Cash reserved for future claim  settlements and accumulated dividends |   | 1,349    |   | 6,506    |   |
| Cash reserved for future New  Preferred redemptions                   |   | 2,756    |   | 9,264    |   |
| Cash balances of wholly owned  insurance subsidiary                   |   | 2,944    |   | 2,909    |   |
|                                                                  |   |     |   |     |   |
|                                                                  |   | $        | 7,049  |     | $      | 18,679 |   |

 

Supplemental cash flow information for theyears ended December 31, is as follows:

 
|                                                              |   | **2003** |   | **2002** |   |
|-------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Cash payments for income taxes                                    |   | $        | 4,010  |     | $      | 930 |   |
| Payment of preferred dividends  included in continuing operations |   | 953      |   | —   |   |
| Non cash transactions:                                            |   |     |   |     |   |
| Issuance of New Common Stock to  directors                        |   | 22       |   | 10       |   |
| Issuance of Preferred Stock                                       |   | —   |   | 38       |   |
|                                                                   |        |          |        |          |        |  |  |

 

MarketableSecurities:  In December 2001, theCompany recorded a gain on the stock demutualization of a non-affiliatedinsurance company.  The gain wascalculated based upon the fair value of the securities on the date of theinsurance company’s initial public offering. These securities were sold inFebruary 2002.  Investments classifiedas available for sale are measured at fair value in the financial statementswith unrealized gains and losses reported, net of tax, in other comprehensiveincome (loss).

 

F-8

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Adoption of FIN 45: In November 2002, FASBInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others, anInterpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASBInterpretation No. 34,” (“FIN 45”) was issued. FIN 45 clarifies the requirements of SFAS No. 5, “Accounting forContingencies,” relating to guarantors’ accounting for, and disclosure of, theissuance of certain types of guarantees. The disclosure provisions of FIN 45 are applicable to interim or annualperiods that end after December 15, 2002, and did not have an impact on theDecember 31, 2003 financial statements. The provisions for initial recognition and measurement under FIN 45 areeffective on a prospective basis for guarantees that are issued or modifiedafter December 31, 2002.  The initialrecognition and measurement provisions under FIN 45 did not have any impact onour financial statements.

 

Adoption of FAS 150: On May 31, 2003, FASBissued FASB Statement No. 150 (FAS 150), “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity.”  FAS 150 improves the accounting for certainfinancial instruments that, under previous guidance, issuers could account foras equity and requires that those instruments be classified as liabilities (orassets in certain circumstances) in statements of financial position.  FAS 150 also requires disclosures aboutalternative ways of settling the instruments and the capital structure ofentities – all of whose shares are mandatorily redeemable.  FAS 150 was to have been generally effectivefor all financial instruments entered into or modified after May 31, 2003, andotherwise effective at the beginning of the first interim period beginningafter June 15, 2003.  Recently, the FASBhas deferred for an indefinite period the effective date for certaininstruments and entities.  As discussedin Note 8, the Company has adopted the provisions of FAS 150 in the thirdquarter of 2003.

 

# **Adoption ofFAS 142:  The Company adopted Statementof Financial Accounting Standards No. 142 (FAS 142), *Goodwill and Other Intangible Assets*effective January 1,2002.  Under FAS 142, intangible assets withindefinite lives will no longer be amortized but are reviewed annually (or morefrequently if impairment indicators arise) for impairment.  Recognized intangible assets withdeterminable useful lives will continue to be amortized.  The Company’s only intangible asset relatesto its investment in Kaiser-Hill recorded upon the adoption of fresh-startreporting.  This intangible asset of$21.1 million is being amortized on a straight-line basis through 2006, which isthe date currently estimated for Kaiser-Hill’s completion of the ClosureContract. Total accumulated amortization as of December 31, 2003 was $10.6million.  The amortization expenseassociated with this intangible is recorded as a reduction to the equity incomein earnings of affiliate on the consolidation statement of operations.  The estimate amortization expense for theremaining life of this intangible asset is:**

 
| **Year ending  December 31:** |   | **Amount  (dollars in thousands)** |   |
|-------------------------------|--------|------------------------------------|--------|
| 2004                          |   | $                                  | 3,524  |   |
| 2005                          |   | 3,524                              |   |
| 2006                          |   | 3,524                              |   |
|                          |   | $                                  | 10,572 |   |

 

Use of Estimates: The preparation offinancial statements in conformity with generally accepted accountingprinciples in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosed amounts of contingent assets and liabilities at thedate of the financial statements, and the amounts of revenues and expensesrecognized during the reporting period. Such estimates include those related to allowances for contract andnotes receivable and accrued interest, deferred tax assets and valuationallowance, recoverability of net assets of discontinued operations and otherinvestments, assumptions used to determine the retiree medical obligation, theamortization period for the excess value attributed to the Kaiser-Hillinvestment and the remaining Allowed Claims. Actual results could differ fromthose estimates.

 

Concentrations of Credit Risk: The Companymaintains cash balances primarily in overnight Eurodollar deposits, investment-gradecommercial paper, bank certificates of deposit, and U.S. government securities.

 

Reclassifications:   Certain reclassifications have been made to the prior-periodfinancial statements contained herein in order to conform them to the 2003presentation.

 

In January 2003, the Financial AccountingStandards Board (FASB) issued Interpretation (FIN) 46, “Consolidation ofVariable Interest Entities,” which provides guidance on when to consolidatevariable interest entities. In December 2003, FASB revised FIN 46 with FIN46R. In addition to conforming to previously issued FASB Staff Positions, FIN46R deferred the implementation date for certain variable interest entities.The Company will adopt the provisions of FIN 46R immediately for entitiescreated after December 31, 2003. For entities created beforeDecember 31, 2003, the Company will adopt FIN 46R in the first quarter of2005, as required by FIN 46R.   TheCompany does not currently have any entities that would be considered variableinterest entities under FIN 46R.

 

F-9

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In December 2003, the FASB issued SFAS No. 132 (Revised2003), “Employers’ Disclosures about Pensions and Other PostretirementBenefits.” SFAS No. 132(R) increases the existing disclosure requirementsby requiring more details about pension plan assets, benefit obligations, cashflows, benefit costs and related information. Companies will be required tosegregate plan assets by category, such as debt, equity and real estate, and toprovide certain expected rates of return and other informational disclosures.The new disclosure requirements required by SFAS No. 132(R) are effectivefor us for the year ending after June 15, 2004. The Company will adopt thenew SFAS No. 132(R) disclosure requirements for the year endingDecember 31, 2004.

 

4.             NetAssets of Discontinued Operations

 

The components of the “Net Assets ofDiscontinued Operations” consist entirely of the carrying value of the netassets of the Nova Hut project and were as follows at December 31:

 
|                                                 |   | **2003** |   | **2002** |   |
|------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                 |   |     |   |     |   |
| Cash                                                 |   | $        | 22     |     | $      | 26 |   |
| Letter of credit cash  collateral drawn by Nova Hut  |   | 11,100   |   | 11,100   |   |
| Retained accounts receivable                         |   | 20,703   |   | 20,126   |   |
| Prepaid expenses and other  current assets           |   | —   |   | 1        |   |
| Subcontractor retentions and  other accounts payable |   | (5,230   | )      | (8,000   | )      |
|                                                 |   | 26,595   |   | 23,253   |   |
| Allowance for estimated loss                         |   | (23,595  | )      | (17,253  | )      |
|                                                 |   | $        | 3,000  |     | $      | 6,000 |   |

 

Although Old Kaiser sold its Metals, Mining and Industry business unitin August 2000, it retained its Netherlands subsidiary, Kaiser Netherlands,B.V., which had been responsible for a turnkey engineering and constructionservices contract for the construction of a steel mini-mill in the CzechRepublic for Nova Hut.  After constructionof the mini-mill was complete in 2000, the contract with Nova Hut provided fora maximum of three possible performance tests. The first performance test wascompleted on November 13, 2000. Kaiser Netherlands believes that the firstperformance test was successful and that Nova Hut should have agreed to finalacceptance of the mini-mill and made final payment of amounts accrued by KaiserNetherlands throughout the project, including fee and retention amounts withrelease of performance guarantee instruments. Nova Hut, however, asserted that the first test was not successful.Kaiser Netherlands believes that such contention may have been put forth inresponse to severe financial constraints on Nova Hut’s operations resultingfrom then weakening conditions in the worldwide steel market and thesignificant amounts that Kaiser Netherlands believed it was contractually due.To date, this dispute has not been resolved, and Kaiser Netherlands hasresorted to legal proceedings to enforce its rights.  The primary legal venue up until this time has been the Delawarebankruptcy proceeding for Old Kaiser, where the Company has asserted claimsagainst Nova Hut and the International Finance Corporation (“IFC”).  The Delaware bankruptcy court has previouslyruled that the Company, as opposed to Kaiser Netherlands, could proceed withprosecution of its specific claims against Nova Hut and IFC in the Delawarebankruptcy court venue.  Both Nova Hutand IFC appealed this ruling and, during the first quarter 2004, the Delawarebankruptcy court’s decision regarding the IFC was overturned by the DistrictCourt, ruling that the IFC enjoys sovereign immunity from prosecution.  Kaiser Holdings has filed a notice of appealto the Third Circuit regarding this decision in favor of the IFC.  At this date, the Nova Hut appeal is stillpending at the District Court level.

 

In December 2003, the International Chamber of Commerce (“ICC”), underthe dispute resolution provisions of the Nova Hut mini-mill subcontract betweenKaiser Netherlands and the mini-mill’s main equipment supplier, Tippins, Inc.,issued a final award that was on balance favorable to Kaiser Netherlands.  As a result of the ruling, KaiserNetherlands was relieved of the obligation to pay additional retention toTippins and Kaiser Netherlands was awarded a net cash settlement of $2.6million.  The Company has not recordedthis settlement due to the uncertainties regarding collectibility.  However, the Company intends to vigorouslypursue collection of this settlement.

 

In January 2004, Kaiser Netherlands filed arbitration claims againstNova Hut in excess of $40.0 million with the ICC.  The arbitration panel is currently being constituted, and thefirst hearing should take place during the second or third quarter of 2004 withthe earliest possible final award ruling being issued sometime in 2005.  Nova Hut has submitted a $46.0 millioncounterclaim against Kaiser Netherlands in these same ICC proceedings.

 

The continued litigation of these disputes, as well as the cost of apossible ongoing presence in Ostrava, Czech Republic, has had and will continueto have a negative impact on the cash flow of Kaiser Netherlands and KaiserHoldings.

 

F-10

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Based on the Company’s continued concern overNova Hut’s financial difficulties and the lack of a settlement resulting froman earlier, bankruptcy court-sponsored mediation, in the fourth quarter of 2003the Company further reduced the carrying value of the remaining Nova Hutproject assets from $6.0 million to $3.0 million by recording an additionalreserve of $3.0 million, net of a $1.1 million income tax benefit, through acharge to “Loss from Discontinued Operations”. This reserve is in addition to a reserve recorded in 2001, which reducedthe carrying value of the Nova Hut project assets from $21.6 million to $6.0million by recording a reserve of approximately $9.8 million, netof a $5.8 million income tax benefit,through a charge to “Loss from Discontinued Operations”.  These adjustments to the project assetcarrying value have been determined based on the Company’s estimate of NovaHut’s current ability to pay such liability.

 

5.             BusinessSegments and Foreign Operations

 

Business Segments:  The Company had no reportable segments atany time during 2003, 2002 or 2001.

 

Foreign Operations: Because all of theCompany’s international operations are presented in the accompanying Statementsof Operations as “Discontinued Operations,” all of the Company’s reported grossrevenue and operating income (loss) from continuing operations were fromdomestic sources.  Remaining foreignassets consist solely of the carrying value of the net realizable value of theNova Hut contract matter (See “Net Assets of Discontinued Operations” and“Other Contingencies”).

 

6.             JointVentures and Affiliated Companies

 

**Prior toDecember 31, 2000, the Company had ownership interests in certainunconsolidated corporate joint ventures and affiliated companies.   During 1999 and 2000, the Company divestedof the majority of such investments.  AtDecember 31, 2003 and 2002, it retained a 50% investment in Kaiser-Hill.  The Company’s net investments in/or amountsdue from this corporate joint venture and affiliated company totaled $45.8million and $45.7 million at December 31, 2003 and 2002, respectively. The Companyaccounts for the Kaiser-Hill Company LLC investment using the equitymethod.  The difference between theCompany’s carrying value of the investment in Kaiser-Hill and its 50%underlying equity in Kaiser-Hill’s net assets was $10.6 million and $14.1 million,respectively, as of December 31, 2003 and 2002 and is being amortized on astraight-line basis through 2006 (the date currently estimated forKaiser-Hill’s completion of the Closure Contract.)**

** **

ICF Consulting Group, Inc.:  In 2002, a settlement was reached between theCompany and ICF Consulting, whereby the Company agreed to restructure the ICFConsulting notes totaling $6.6 million and accrued interest of $0.7 million,net of reserves, for a new promissory note of $6.4 million (New Note) bearing interestat 8.5% per annum.  In return ICFConsulting agreed to withdraw all claims against the Company, release cash inescrow and purchase the Company’s 10% ownership in ICF Consulting, carryingvalue of $1.1 million, for $4.5 million. See Note 7 below**.**

 

**Kaiser-Hill:   Summarized financial information ofKaiser-Hill Company was as follows as of December 31 (in thousands):**

 
|                       |   | **2003** |    | **2002** |   | **2001** |   |
|----------------------------|--------|----------|---------|----------|--------|----------|--------|
|                       |   |     |    |     |   |     |   |
| Current assets             |   | $        | 117,148 |     | $      | 115,030  |   | $ | 136,056 |   |
| Non-current assets         |   | 114,701  |    | 78,734   |   | 17,441   |   |
| Current liabilities        |   | 111,370  |    | 107,586  |   | 125,377  |   |
| Non-current liabilities    |   | 55,647   |    | 28,644   |   | 12,800   |   |
|                       |   |     |    |     |   |     |   |
| Gross revenue              |   | $        | 712,270 |     | $      | 732,718  |   | $ | 718,788 |   |
| Subcontracts and materials |   | (379,215 | )       | (367,355 | )      | (417,180 | )      |
| Service revenue            |   | 333,055  |    | 365,363  |   | 301,608  |   |
| Operating expenses         |   | (293,056 | )       | (291,986 | )      | (271,977 | )      |
| Other income (expense)     |   | (1       | )       | 137      |   | 453      |   |
| Net income                 |   | $        | 39,998  |     | $      | 73,514   |   | $ | 30,084 |   |

 

Under the Closure Contract, Kaiser-Hill is not responsible for, and theDOE pays all costs associated with, any liability, including, withoutlimitation, any claims involving strict or absolute liability and any civilfine or penalty, expense, or remediation cost, but limited to those of a civilnature, which may be incurred by, imposed on, or asserted against Kaiser-Hillarising out of any act or failure to act, condition, or exposure which occurredbefore Kaiser-Hill assumed responsibility on July 1, 1995 (“pre-existingconditions”). To the extent the acts or omissions of Kaiser-Hill constitutewillful misconduct, lack of good faith, or failure to exercise prudent businessjudgment on the part of Kaiser-Hill’s managerial personnel and cause or add toany liability, expense, or remediation cost resulting from pre-existingconditions, Kaiser-Hill is responsible, but only for the incremental liability,expense, or remediation caused by Kaiser-Hill.

 

The ClosureContract further provides that Kaiser-Hill will be reimbursed for thereasonable cost of bonds and insurance allocable to the contract and forliabilities and expenses incidental to these liabilities, including litigationcosts, to third

 

F-11

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parties notcompensated by insurance or otherwise. There is an exception to thisreimbursement provision applicable to liabilities caused by the willfulmisconduct, lack of good faith or failure to exercise prudent business judgmentby Kaiser-Hill’s managerial personnel.

 

With respect to a revolving credit facility obtained by Kaiser-Hill inNovember 1999, both parents of Kaiser-Hill granted a first lien securityinterest to the Kaiser-Hill lenders in all of the ownership and equity interestof Kaiser-Hill and have agreed to cure any events of default by Kaiser-Hill onthe facility.  As of December 31, 2003 and 2002, Kaiser-Hill had no cash balancesoutstanding on its revolving credit.

 

7.             Notesreceivable

 

In June 2002, a settlement was reachedbetween the Company and ICF Consulting, whereby the Company agreed torestructure the ICF Consulting notes totaling $6.6 million and accrued interestof $0.7 million, net of reserves, for a new promissory note of $6.4 million(New Note) bearing interest at 8.5% per annum. The New Note is subordinated to the rights to ICF Consulting’s seniorbank lenders.  In return ICF Consultingagreed to withdraw all claims against the Company, release cash in escrowtotaling $0.8 million and purchase the Company’s 10% ownership in ICFConsulting, carrying value of $1.1 million, for $4.5 million.

 

At December 31, 2002, all terms of thesettlement agreement between the Company and ICF Consulting had beenimplemented.   Due to uncertaintiesabout the ultimate collectibility of the New Note and accrued interest, andconsidering the fact that ICF Consulting had defaulted on the previously heldICF Consulting notes, the Company has recorded a reserve of $0.5 millionagainst the New Note.

 

8.             MandatorilyRedeemable Preferred Stock

 

Kaiser Holdings’ certificate of incorporationauthorizes the issuance of 2,000,000 shares of New Preferred. Resulting fromits initial bankruptcy distribution on April 17, 2001 (see Note 2), the Companyhad $35.2 million, net of $5.6 million of treasury stock and $55.9 million, netof $6.6 million of treasury stock, in New Preferred outstanding at December 31,2003 and 2002, respectively. The New Preferred is a series of authorizedpreferred stock designated as “Series 1 Redeemable Cumulative Preferred Stock,”and has a par value of $0.01 per share. The New Preferred ranks ahead of KaiserHoldings’ New Common.

 

The Company adopted FAS 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity” effective July 1, 2003.  Due tothe mandatorily redeemable feature of the New Preferred, described in greaterdetail below, the New Preferred has been reclassified from mezzanine equity toa long term liability on the consolidated balance sheet, and the preferredstock dividends have been reclassified to interest expense on the consolidatedstatement of operations effective July 1, 2003.  There was no transition adjustment recognized upon adoption ofFAS 150.  There were 639,542 and1,017,120 shares of New Preferred outstanding at December 31, 2003 and 2002,respectively, net of 101,471 and 119,587 treasury shares, respectively.  The New Preferred is shown at liquidationvalue of $55 per share.

 

Pursuant to approval by the Company’s Boardof Directors, in 2003 and 2002 the Company purchased 6,848 and 119,587 shares,respectively, of outstanding New Preferred at prices ranging from $25.62 to$50.55 per share.  The treasury shareshave been recorded at liquidation preference, $55 per share, as a reduction topreferred stock and the remaining difference between cost and the liquidationpreference was recorded as an increase to paid-in capital.

 

The certificate of incorporation of KaiserHoldings and Delaware law permit the Board of Directors to issue additionalseries of preferred stock, except that the Board of Directors may not authorizethe issuance of any securities that rank senior to or on a parity with the NewPreferred without the consent of holders of at least two-thirds of the NewPreferred.

 

Cumulative dividends, classified as interestexpense subsequent to July 1, 2003, on the New Preferred are payable on aquarterly basis, as of April 30, July 31, October 31 and January 31, either incash at an annual rate of 7% of the liquidation preference per share or inadditional shares of New Preferred at an annual rate of 12% of the per shareliquidation preference. Dividends accrue on the New Preferred commencing withthe initial distribution date, April 17, 2001. Dividends will not be paid toany affiliate of Kaiser Holdings on account of that affiliate’s ownership ofshares of preferred stock. If Kaiser Holdings fails to pay a quarterly dividendwhen due, holders of New Preferred will have the right to elect an additionaldirector for each dividend payment missed, up to a maximum of two additionaldirectors, but only until such dividend is paid or provided for in full.   The dividend due to holders of record onJanuary 31, 2004, totaling approximately $0.6 million, was paid on February 7,2004.  At December 31, 2003, in additionto the $0.7 million of cash reserves for unresolved claims, the Company had$0.6 million in cash reserved for the payment of accrued dividends on anyfuture issuances of New Preferred issued as a result of remaining bankruptcyclaims resolutions (any New Preferred issued as a result of claims resolutionsalso

 

F-12

----

 

carries the right to dividends retroactivelyfrom April 17, 2001).

 

The New Preferred has a liquidationpreference of $55 per share plus the amount of unpaid dividends, if any. Uponthe liquidation or dissolution of Kaiser Holdings, each holder of New Preferred(other than an affiliate of Kaiser Holdings) is entitled to this per shareliquidation preference before any holders of New Common or any other juniorsecurities of Kaiser Holdings receive any payment for their shares. If, in aliquidation or dissolution setting, assets remaining after distribution toholders of debt and other obligations are insufficient to pay all holders ofNew Preferred the per share liquidation preference, then such assets will bedistributed on a proportionate basis to the holders of New Preferred (otherthan affiliates of Kaiser Holdings) and any securities ranking on a parity withthe New Preferred.

 

The Company has the option to redeem the NewPreferred at any time, in whole or in part, at a redemption price of 100% ofthe liquidation preference per share plus all accrued and unpaid dividends. TheCompany is required to offer to purchase the New Preferred at 100% of theliquidation preference per share plus all accrued and unpaid dividends inconnection with a change of control of Kaiser Holdings.  In addition, any net proceeds in excess of$3 million in a calendar year received by the Company or any of its direct orindirect subsidiaries from the disposition of assets to an unaffiliated partyoutside of the ordinary course of business must be used to redeem New Preferredat a redemption price of 100% of the liquidation preference per share plus allaccrued and unpaid dividends. Furthermore, to the extent that certaincategories of cash are received from Nova Hut, such cash must be used to redeemNew Preferred at a redemption price of 100% of the liquidation preference pershare plus all accrued and unpaid dividends.

 

All outstanding shares of New Preferred arerequired to be redeemed by the Company on or before December 31, 2007, and ifsuch redemption does not occur, holders of New Preferred will be entitled toelect two-thirds of the directors of the Company. If shares of preferred stockare held by any affiliate of the Company, those shares may not be redeemedpursuant to any of the redemption provisions otherwise applicable to the NewPreferred.

 

Holders of New Preferred generally are entitled to vote with holders ofNew Common on all matters submitted to a vote of shareholders, with each shareof New Preferred being entitled to one-tenth of a vote. In addition, holders ofNew Preferred have the right to vote separately as a class to exercise theirright to elect an additional director due to a failure to pay a quarterlydividend, to elect two-thirds of the directors if the New Preferred is notredeemed by December 31, 2007, and to consent to the issuance of any senior orparity securities. The terms of the New Preferred may not be materially oradversely modified without the consent of holders of at least two-thirds of theNew Preferred. If the Company or any of its affiliates holds any New Preferred,they will not be entitled to vote that New Preferred.

 

The Plan provides that Major Stockholders(defined as holders of 10% or more of the outstanding shares of New Preferredor New Common, or a person who is an “affiliate” of Kaiser Holdings as definedunder the Federal securities laws) have certain registration rights. Ingeneral, a Major Stockholder may request Kaiser Holdings to register under theSecurities Act of 1933 for the sale of all, but not less than all, of the NewPreferred and/or New Common owned by the Major Stockholder. Upon request forsuch a registration from a Major Stockholder, Kaiser Holdings is required togive notice to other Major Stockholders and use its best efforts to cause aregistration statement to become effective as expeditiously as possible andmaintain such registration statement current for a period of 12 months. MajorStockholders are not entitled to request registration until one year after theEffective Date, and Kaiser Holdings is not obligated to file a registrationstatement in response to a request from a Major Stockholder until such time asKaiser Holdings is eligible to use Form S-3 under the Securities Act of 1933for such an offering. Kaiser Holdings is not required to effect more than oneregistration for Major Stockholders during any twelve-month period. Theseregistration rights expire on December 31, 2007. The Plan also contemplatesthat Major Stockholders will have “piggyback” registration rights in connectionwith a proposed underwritten public offering of Kaiser Holdings New Common orNew Preferred solely for cash and for its own account.

 

Kaiser Government Programs, Inc.’s (“KGP”)Put Rights 

 

KGP is the Company subsidiary that owns (througha wholly owned subsidiary of KGP) the 50% interest in Kaiser-Hill CompanyLLC.  KGP has outstanding put rights,expiring on December 31, 2007, that obligate it to purchase New Preferred ownedby a holder of the put right, at the holder’s option, under threecircumstances:

 

**•**                  if KGP receives net after-tax proceeds from any cash distributions fromKaiser-Hill that, on a quarterly basis, exceed 2.8 times the amount of cashrequired to pay all past accrued but unpaid cash dividends on the NewPreferred, plus the next scheduled quarterly cash dividend on New Preferred;

•                  if KGP receives netafter-tax proceeds from any director indirect disposition of any interest in Kaiser-Hill; or

•                  if KGP receives net after-tax proceeds from anextraordinary distribution from Kaiser-Hill.

 

F-13

----

 

Upon exercise of a put, KGP will pay anexercising holder 100% of the liquidation preference of the preferred stockthat is the subject of the KGP put rights, plus all accrued and unpaiddividends on the preferred stock. KGP will purchase shares of preferred stockon a pro rata basis based upon the number of shares of preferred stock as towhich puts have been properly exercised, but only up to the amount of theavailable net after-tax proceeds from triggering events. KGP will not purchaseany fractional shares. KGP put rights will not become exercisable morefrequently than every 12 months unless the cumulative amount of available netafter-tax proceeds from triggering events is at least $3 million.  KGP put rights are transferable except thatputs shall cease to be transferable if KGP determines that any further transferwould require registration of the puts as a class of securities under theSecurities Exchange Act of 1934. Kaiser Holdings does not presently plan toarrange for trading of the KGP put rights on the NASD electronic bulletin boardor otherwise.

 

The Company received distributions fromKaiser-Hill during the third quarter of 2003 and the fourth quarter of 2002 inamounts that triggered the put rights – effectively requiring the Company toredeem certain New Preferred.  Inaddition, the Company had certain restricted cash balances available, whichpursuant to the terms of its Plan of Reorganization are required to be used toredeem outstanding New Preferred. Rather than using the mechanism of the put rights to satisfy theCompany’s obligations to holders of the put rights after a trigger, the Companyobserved the requirements in the Plan of Reorganization to use certainrestricted cash balances, and in the terms of the New Preferred, to use certainavailable cash, for preferred redemptions. In January and October 2003, the Company redeemed $14.1 million and 6.2million, respectively, liquidation preference of New Preferred or 282,000 and113,530 shares, respectively.  TheCompany believes this was a more cost-efficient manner of satisfying theobligations associated with the KGP put rights and plans to continue to usethis redemption process to satisfy such obligations in the future.

 

In February 2004, the Company redeemed $5.3million liquidation preference of New Preferred or 95,932 shares.

 

9.             NewCommon Stock

 

The Kaiser Holdings certificate ofincorporation authorizes the issuance of 3,000,000 shares of New Common.  Pursuant to the Company’s Plan, holders ofAllowed Class 4 Claims and Allowed Class 5 Equity Interests are to receiveshares of New Common Stock under the Plan.

 

In connection with its initial distributionout of bankruptcy on or about April 17, 2001, Kaiser Holdings issued to holdersof Allowed Class 4 Claims one share of New Common for each $100.00 of suchholder’s respective Allowed Class 4 Claim. Subsequent to April 17, 2001, 823 shares of New Common have been issuedrelated to the settlement of claims.

 

Holders of Allowed Class 5 Equity Interestsreceived their pro rata portion of New Common representing 15% of the aggregateamount of New Common to be outstanding following distributions to holders ofAllowed Class 4 Claims and Allowed Class 5 Equity Interests. This outcome wasaccomplished by issuing to each holder of an Allowed Class 5 Equity Interestits pro rata portion of the number of shares of New Common that represents17.65% of the total number of shares of New Common issued from time to time toholders of Allowed Class 4 Claims.

 

All shares of New Common, at issuance, wereduly authorized, fully paid and non-assessable. The holders of such shares willhave no preemptive or other rights to subscribe for additional shares. The NewCommon has a par value of $0.01 per share. Based on its current estimates ofthe aggregate amount of Allowed Class 4 Claims and cash available fordistribution, Kaiser Holdings expects to ultimately issue no more than1,715,000 shares of New Common to holders of Allowed Class 4 Claims and AllowedClass 5 Equity Interests.  See Note 14below with respect to Bankruptcy Court ruling that could affect this estimate.

 

Old Kaiser never paid cash dividends on itsOld Common. Kaiser Holdings anticipates that for the foreseeable future no cashdividends will be paid on the New Common and that Kaiser Holdings’ earningswill be utilized to redeem New Preferred or retained for use in the business.The Board of Directors of Kaiser Holdings will determine its dividend policybased on its results of operations, payment of dividends on, and redemption of,New Preferred, financial condition, capital requirements, and othercircumstances.

 

F-14

----

 

10.           Leases

 

The Company has the following future commitmentson material noncancelable operating leases with initial or remaining terms inexcess of one year at December 31, 2003:

 
| **Year ending  December 31:** |   | **Amount  (dollars in thousands)** |   |
|-------------------------------|--------|------------------------------------|--------|
| 2004                          |   | $                                  | 61     |   |
| 2005                          |   | 26                                 |   |
| 2006                          |   | 2                                  |   |
|                          |   | $                                  | 89     |   |

 

The total rental expense for all operatingleases was $133,000 and $141,000 during the years ended December 31, 2003 and2002.

 

11.           IncomeTaxes

 

The components of net income (loss) used tocompute the (expense) benefit for income taxes for the years ended December 31were as follows (in thousands):

 

 
|                                                                           |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Income from continuing  operations before income taxes and minority interests: |   |     |   |     |   |     |   |
| Domestic                                                                       |   | $        | 11,028 |     | $      | 29,165   |   | $ | 7,657 |   |
| Foreign                                                                        |   | —   |   | —-  |   | —   |   |
|                                                                           |   | $        | 11,028 |     | $      | 29,165   |   | $ | 7,657 |   |
| (Expense) benefit for income  taxes:                                           |   |     |   |     |   |     |   |
| Federal:                                                                       |   |     |   |     |   |     |   |
| Current                                                                        |   | $        | (3,013 | )        | $      | (243     | )      | $ | (809 | ) |
| Deferred                                                                       |   | (1,228   | )      | (9,711   | )      | (1,222   | )      |
|                                                                           |   | (4,241   | )      | (9,954   | )      | (2,031   | )      |
| State:                                                                         |   |     |   |     |   |     |   |
| Current                                                                        |   | (248     | )      | (121     | )      | (296     | )      |
| Deferred                                                                       |   | (338     | )      | (1,244   | )      | (90      | )      |
|                                                                           |   | (586     | )      | (1,365   | )      | (386     | )      |
| Foreign:                                                                       |   |     |   |     |   |     |   |
| Current                                                                        |   | —   |   | —   |   | —   |   |
| Deferred                                                                       |   | —   |   | —   |   | —   |   |
|                                                                           |   | $        | (4,827 | )        | $      | (11,319  | )      | $ | (2,417 | ) |

 

 

The effective income tax (expense) benefitvaried from the federal statutory income tax (expense) benefit because of thefollowing differences (in thousands):

 
|                                                                 |   | **2003** |   | **2002** |   | **2001** |   |
|----------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                 |   |     |   |     |   |     |   |
| Income tax (expense) benefit computed at  federal statutory tax rate |   | $        | (3,860 | )        | $      | (10,208  | )      | $ | (2,604 | ) |
|                                                                 |   |     |   |     |   |     |   |
| Change in tax (expense) benefit from:                                |   |     |   |     |   |     |   |
| State income taxes                                                   |   | (381     | )      | (886     | )      | (255     | )      |
| Valuation allowance                                                  |   | —   |   | —   |   | 886      |   |
| Business meals and entertainment                                     |   | (27      | )      | (26      | )      | (35      | )      |
| Restructuring costs                                                  |   | —   |   | (36      | )      | (41      | )      |
| Penalties and fines                                                  |   | (92      | )      | (32      | )      | (121     | )      |
| Lobbying costs                                                       |   | —   |   | (72      | )      | (51      | )      |
| Reversals and other                                                  |   | 10       |   | (59      | )      | (196     | )      |
| Preferred Dividend                                                   |   | (477     | )      | —   |   | —   |   |
|                                                                 |   | (967     | )      | (1,111   | )      | 187      |   |
|                                                                 |   | $        | (4,827 | )        | $      | (11,319  | )      | $ | (2,417 | ) |

 

F-15

----

 

The tax effects of the principal temporarydifferences and carryforwards that give rise to the Company’s net deferred taxasset (liability) are as follows (in thousands):

 
|                                          |   | **2003** |   | **2002** |   |
|-----------------------------------------------|--------|----------|--------|----------|--------|
|                                          |   |     |   |     |   |
| Net operating loss carryforwards              |   | $        | — |     | $      | 529 |   |
| Reserves for adjustments and allowances       |   | 8,045    |   | 6,680    |   |
| Vacation and incentive compensation  accruals |   | 67       |   | 95       |   |
| Tax credit carryforwards                      |   | —   |   | 685      |   |
| Investment in Kaiser-Hill                     |   | (12,693  | )      | (12,428  | )      |
| Write-down of other investments               |   | (1,914   | )      | (2,099   | )      |
|                                          |   | $        | (6,495 | )        | $      | (6,538 | ) |

 

The ability toderive future benefit from some of the elements contributing to the netdeferred tax liability at December 31, 2003 is dependent on the Company’sability to generate sufficient taxable income prior to expiration.  In the fourth quarter of 2002, the Companydetermined that in addition to the reduction of tax carryforwards due to thebankruptcy exception of 382, the tax basis of various assets also was requiredto be reduced.  This created a deferredtax liability that would be due upon disposition of the assets. The Companybelieves that the results of its future operations will be sufficient to assureutilization of the tax benefits prior to expiration.

 

InDecember 2000, the Chapter 11 bankruptcy reorganization of the Companycaused a change in control under Internal Revenue Code (IRC) Sec. 382.  In 2001, the Company determined that thechange in control met the stringent guidelines of the bankruptcy exceptionprovided under the Internal Revenue Code. This resulted in the Company not being subject to the carryforwardlimitations of IRC Sec. 382.  However,the Company was required to reduce certain carryovers that included netoperating losses and credits.  TheCompany offset the reduction of the carryforwards with the valuation allowancepreviously established for those carryforwards.

 

In 2003 the Company utilized its 2002 net operating loss carryforwardof $1,511,000 and tax credit carry forward of $685,000.

 

12.                                       Retiree Benefits Plans

 

Post Employment Benefit Plan: As ofDecember 31, 2003 the Company is required to continue to fulfill theprovisions of a previously curtailed plan which provides certain medical anddental benefits to a group of retirees. A portion of the benefit is fullyinsured and a portion is covered by the Company’s self-insurance. In respect tothe retirees covered by the self-insured plan, the benefits are funded to aninsurance company as participants’ insurance claims are reimbursed. The Companyis considering changing elements of this plan coverage.

 

The benefit cost for this curtailed plan forthe years ended December 31 consisted of the following (in thousands):

 
|                |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------|--------|----------|--------|----------|--------|----------|--------|
|                |   |     |   |     |   |     |   |
| Interest cost       |   | $        | 470    |     | $      | 502      |   | $ | 505 |   |
|                |   |     |   |     |   |     |   |
| Net benefit  charge |   | $        | 470    |     | $      | 502      |   | $ | 505 |   |

 

Because there are no new participants in thisplan, there is no current service cost. The change in the status of the plan asof December 31 was as follows (in thousands):

 
|                                         |   | **2003** |   | **2002** |   | **2001** |   |
|----------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                         |   |     |   |     |   |     |   |
| Benefit  obligation at January 1,       |   | $        | 7,193  |     | $      | 7,473    |   | $ | 7,982 |   |
| Service cost                                 |   | —   |   | —-  |   | —   |   |
| Interest cost                                |   | 470      |   | 502      |   | 505      |   |
| Benefits paid                                |   | (1,107   | )      | (1,249   | )      | (1,014   | )      |
| Actuarial  (gain) loss                       |   | 925      |   | 1,005    |   | 979      |   |
| Benefit  obligation at December 31,     |   | 7,481    |   | 7,731    |   | 8,452    |   |
| Unrecognized  net gain (loss)                |   | (568     | )      | (538     | )      | (979     | )      |
| Net benefit  obligation at December 31, |   | $        | 6,913  |     | $      | 7,193    |   | $ | 7,473 |   |

 

The discount rate used in determining theexpense was 6.0% and 6.5% for 2003 and 2002, respectively. Pursuant to theterms of the plan obligations, changes in medical cost trend rates have nofinancial impact on the actuarial valuation as the cost of the benefit to theparticipant has exceeded the Company’s commitment.  At December 31, 2003, there is a $568,000 unrecognized lossrelated to changes in actuarial assumptions. This loss will be amortized over three years.

 

F-16

----

 

13.                                 Benefits and Compensation Plans

 

The Company sponsors a 401(k) Plan thatallows employees to defer portions of their salary, subject to certain limitations.Total expense for this plan for the years ended December 31, 2003 and 2002was $177,000 and $290,000, respectively.

 

14.                                 Other Contingencies

 

Kaiser Holdings has various obligations and liabilities from itscontinuing operations, including general overhead expenses in connection withmaintaining, operating and winding down the various entities and net assetscomprising Kaiser Holdings.

 

Kaiser Holdings has various obligations and liabilities from itscontinuing operations, including general overhead expenses in connection withmaintaining, operating and winding down the various entities and net assetscomprising Kaiser Holdings. Additionally, the Company believes contingent liabilities may exist inthe following areas:

 

Nova Hut

 

AlthoughOld Kaiser sold its Metals, Mining and Industry business unit inAugust 2000, it retained its Netherlands subsidiary, Kaiser Netherlands,B.V., which had been responsible for a turnkey engineering and constructionservices contract for the construction of a steel mini-mill in the CzechRepublic for Nova Hut.  Afterconstruction of the mini-mill was complete in 2000, the contract with Nova Hutprovided for a maximum of three possible performance tests. The firstperformance test was completed on November 13, 2000. Kaiser Netherlandsbelieves that the first performance test was successful and that Nova Hutshould have agreed to final acceptance of the mini-mill and made final paymentof amounts accrued by Kaiser Netherlands throughout the project, including feeand retention amounts with release of performance guarantee instruments.  Nova Hut, however, asserted that the firsttest was not successful. Kaiser Netherlands believes that such contention mayhave been put forth in response to severe financial constraints on Nova Hut’soperations resulting from weakening conditions in the worldwide steel marketand the significant amounts that Kaiser Netherlands believed it wascontractually due. To date, this dispute has not been resolved, and KaiserNetherlands has resorted to legal proceedings to enforce its rights.  The primary legal venue up until this timehas been the Delaware bankruptcy proceeding for Old Kaiser, where the Companyhas asserted claims against Nova Hut and the International Finance Corporation(“IFC”).  The Delaware bankruptcy courthas previously ruled that the Company, as opposed to Kaiser Netherlands, couldproceed with prosecution of its specific claims against Nova Hut and IFC in theDelaware bankruptcy court venue.  BothNova Hut and IFC appealed this ruling and during the first quarter 2004, theDelaware bankruptcy court’s decision regarding the IFC was overturned by theDistrict Court, ruling that the IFC enjoys sovereign immunity fromprosecution.  Kaiser Holdings has fileda notice of appeal to the Third Circuit regarding this decision in favor of theIFC.  At this date, the Nova Hut appealis still pending at the District Court level.

 

InDecember 2003, the International Chamber of Commerce (“ICC”), under thedispute resolution provisions of the Nova Hut mini-mill subcontract betweenKaiser Netherlands and the mini-mill’s main equipment supplier, Tippins, Inc.,issued a final award that was on balance favorable to Kaiser Netherlands.  As a result of the ruling, KaiserNetherlands was relieved of the obligation to pay additional retention toTippins and Kaiser Netherlands was awarded a net cash settlement of $2.6million.  The Company has not recordedthis settlement due to the uncertainties regarding collectibility.  However, the Company intends to vigorouslypursue collection of this settlement.

 

InJanuary 2004, Kaiser Netherlands filed arbitration claims against Nova Hutin excess of $40.0 million with the ICC. The arbitration panel is currently being constituted and the firsthearing should take place during the second or third quarter of 2004 with theearliest possible final award ruling being issued sometime in 2005.  Nova Hut is expected to submit amulti-million dollar counterclaim against Kaiser Netherlands in these same ICCproceedings.  According to contract, anysuch counterclaims could not exceed a total of $46 million, net of interest.

 

Thecontinued litigation of these disputes, as well as the cost of a possibleongoing presence in Ostrava, Czech Republic, has had and will continue to havea negative impact on the cash flow of Kaiser Netherlands and Kaiser Holdings.

 

The components of the “Net Assets ofDiscontinued Operations” consist entirely of the carrying value of the netassets of the Nova Hut project.  Basedon the Company’s continued concern over Nova Hut’s financial difficulties andthe lack of a settlement resulting from an earlier, bankruptcy court-sponsoredmediation, in the fourth quarter of 2003, the Company further reduced thecarrying value of the remaining Nova Hut project assets from $6.0 million to$3.0 million by recording an additional reserve of $3.0 million, net of a $1.1million income tax benefit, through a charge to “Loss from DiscontinuedOperations”.  This reserve is in additionto a reserve recorded in 2001, which reduced the carrying value of the Nova Hut

 

F-17

----

 

project assets from $21.6 million to $6.0million by recording a reserve of approximately $9.8 million, netof a $5.8 million income tax benefit,through a charge to “Loss from Discontinued Operations”.  These adjustments to the project assetcarrying value have been determined based on the Company’s estimate of NovaHut’s current ability to pay such liability.

 

Kaiser Hill

 

Under Kaiser-Hill’s contract with the DOE, Kaiser-Hill is notresponsible for, and the DOE pays all costs associated with, any liability,including, without limitation, any claims involving strict or absoluteliability and any civil fine or penalty, expense, or remediation cost, butlimited to those of a civil nature, which may be incurred by, imposed on, orasserted against Kaiser-Hill arising out of any act or failure to act,condition, or exposure which occurred before Kaiser-Hill assumed responsibilityon July 1, 1995 (pre-existing conditions). To the extent the acts oromissions of Kaiser-Hill constitute willful misconduct, lack of good faith, orfailure to exercise prudent business judgment on the part of Kaiser-Hill’smanagerial personnel and cause or add to any liability, expense, or remediationcost resulting from pre-existing conditions, Kaiser-Hill is responsible, butonly for the incremental liability, expense, or remediation caused byKaiser-Hill.

 

The Kaiser-Hill contract further provides that Kaiser-Hill will bereimbursed for the reasonable cost of bonds and insurance allocable to theRocky Flats contract and for liabilities and expenses incidental to theseliabilities, including litigation costs, to third parties not compensated byinsurance or otherwise. There is an exception to this reimbursement provisionapplicable to liabilities caused by the willful misconduct, lack of good faithor failure to exercise prudent business judgment by Kaiser-Hill’s managerialpersonnel.

 

The clean-up and closure of the DOE’s Rocky Flats site involvesubstantial performance risks.  Amongother things, Kaiser-Hill’s activities at the Rocky Flats site involve theclean-up, packaging and transportation of nuclear waste, and the demolition anddestruction of facilities where nuclear weapons components were previouslyproduced.  Some of the activities havenot been previously performed elsewhere, and therefore require the developmentof innovative and untested approaches.  Kaiser-Hillemphasizes safety in its performance, but the nature of the Rocky Flats siteand the activities of Kaiser-Hill and its subcontractors at the site are suchthat serious injuries, or even deaths, are possible.  Significant safety incidents at the site could stop orsignificantly impede the progress of work being performed at the site byKaiser-Hill and its subcontractors.  TheDOE contract contemplates that all, or substantially all, of the nuclear wasteat Rocky Flats will be transported to other sites operated or managed by theDOE.  The appropriate sites for storageof certain of those nuclear wastes have not yet been identified.  In addition, objections have arisen fromtime to time with regard to the transportation and storage of nuclear waste atcertain sites previously scheduled by the DOE to receive waste from Rocky Flats.  Although the DOE contract contemplates thatthe DOE is responsible for providing transportation and storage sites fornuclear waste from Rocky Flats, an inability to store nuclear waste at otherDOE sites would pose a substantial risk to the timely closure of the RockyFlats site, and could interfere with Kaiser-Hill’s ability to earn fees towhich Kaiser-Hill believes it should be entitled.

 

As the contract between Kaiser-Hill and the DOE is cost-reimburseablein nature, the costs invoiced by Kaiser-Hill for reimbursement by the DOE aresubject to audit by the U.S. government. Also since the inception of Kaiser-Hill, the Company invoiced certainmanagement oversight costs to Kaiser-Hill. Government audits at Kaiser-Hill are in process for the years of thepredecessor contract, which ran from 1995 until January 2000.  Although Kaiser-Hill and the Company havehistorically provided for their estimates of disallowed costs oncost-reimburseable contracts, uncertainties exist with regard to whether governmentaudits will result in any disallowed costs needing to be refunded to thegovernment customer.  The continuedadequacy of provisions for reserves with regard to unallowable costs isreviewed regularly.

 

Common Stock

 

On January 20, 2004, the United States Bankruptcy Court for the Districtof Delaware ruled on a claim in favor of former shareholders of ICT SpectrumConstructors, Inc.  The Bankruptcy Courthas refused to reconsider its decision and the Company plans to appeal. Shouldthe Company be unsuccessful in its efforts to achieve reversal of theBankruptcy Court’s ruling, the Company could be required to issue an additional247,350 common shares, which would then comprise approximately 13.4% of theaggregate shares outstanding. The Company believes that issuing such asubstantial number of additional common shares could be expected to have amaterially dilutive effect on the value of common shares presently outstanding.

 

F-18

----

 

15.                                 Selected Quarterly Financial Information(Unaudited)

 

For the year ended December 31, 2003:

 
|                                                    |   | **Fourth  Quarter** |   | **Third  Quarter** |   | **Second  Quarter** |   | **First  Quarter** |   |
|---------------------------------------------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|
|                                                    |   |                |   |               |   |                |   |               |   |
| Operating Income (Loss)                                 |   | 69                  |   | (2,094             | )      | (1,447              | )      | (1,446             | )      |
| Income from continuing operations before income tax     |   | 3,330               |   | 1,509              |   | 3,027               |   | 3,162              |   |
| Income (loss) from continuing operations                |   | 1,799               |   | 617                |   | 1,866               |   | 1,919              |   |
| Income (Loss) from Discontinued Operations,  net of tax |   | (1,833              | )      | —             |   | —              |   | —             |   |
| Net income (loss)                                       |   | (34                 | )      | 617                |   | 1,866               |   | 1,919              |   |
| Preferred stock dividends                               |   | —              |   | —             |   | (702                | )      | (832               | )      |
| Net Income (Loss) Applicable to Common  Shareholders    |   | (34                 | )      | 617                |   | 1,164               |   | 1,087              |   |
|                                                    |   |                |   |               |   |                |   |               |   |
| Basic and Diluted Earnings (Loss) Per  Common Share:    |   |                |   |               |   |                |   |               |   |
| Continuing operations, net of tax                       |   | $                   | 1.12   |               | $      | 0.39                |   | $                  | 0.73   |   | $ | 0.68 |   |
| Discontinued operations, net of tax                     |   | (1.14               | )      | —             |   | —              |   | —             |   |
| Net Earnings (Loss) Per Common Share                    |   | $                   | (0.02  | )                  | $      | 0.39                |   | $                  | 0.73   |   | $ | 0.68 |   |

 

For the year ended December 31, 2002:

 
|                                                        |   | **Fourth  Quarter** |   | **Third  Quarter** |   | **Second  Quarter** |   | **First  Quarter** |   |
|-------------------------------------------------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|
|                                                        |   |                |   |               |   |                |   |               |   |
| Operating Income (Loss)                                     |   | (24                 | )      | (1,735             | )      | (2,641              | )      | (2,628             | )      |
| Income (loss)  from continuing operations before income tax |   | 22,784              |   | 4,259              |   | 876                 |   | 1,246              |   |
| Income (loss) from continuing operations                    |   | 13,867              |   | 2,783              |   | 497                 |   | 699                |   |
| Income (Loss) from Discontinued Operations,  net of tax     |   | 694                 |   | —             |   | (127                | )      | (70                | )      |
| Net income (loss)                                           |   | 14,561              |   | 2,783              |   | 370                 |   | 629                |   |
| Preferred stock dividends                                   |   | (982                | )      | (1,017             | )      | (1,094              | )      | (1,078             | )      |
| Net Income (Loss) Applicable to Common  Shareholders        |   | 13,579              |   | 1,766              |   | (724                | )      | (449               | )      |
|                                                        |   |                |   |               |   |                |   |               |   |
| Basic and Diluted Earnings (Loss) Per  Common Share:        |   |                |   |               |   |                |   |               |   |
| Continuing operations, net of tax                           |   | $                   | 8.11   |               | $      | 1.11                |   | $                  | (0.38  | ) | $ | (0.24 | ) |
| Discontinued operations, net of tax                         |   | 0.43                |   | —             |   | (0.08               | )      | (0.04              | )      |
| Net Earnings (Loss) Per Common Share                        |   | $                   | 8.54   |               | $      | 1.11                |   | $                  | (0.46  | ) | $ | (0.28 | ) |

 

For the year ended December 31, 2001:

 
|                                                        |   | **Fourth  Quarter** |   | **Third  Quarter** |   | **Second  Quarter** |   | **First  Quarter** |   |
|-------------------------------------------------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|
|                                                        |   |                |   |               |   |                |   |               |   |
| Operating Income (Loss)                                     |   | (1,949              | )      | (2,240             | )      | (2,864              | )      | (3,739             | )      |
| Income (loss)  from continuing operations before income tax |   | 6,080               |   | 1,032              |   | 500                 |   | 45                 |   |
| Income (loss) from continuing operations                    |   | 5,478               |   | 231                |   | (495                | )      | 26                 |   |
| Loss from Discontinued Operations, net of  tax              |   | (9,779              | )      | (51                | )      | (367                | )      | —             |   |
| Net income (loss)                                           |   | (4,301              | )      | 180                |   | (862                | )      | 26                 |   |
| Preferred stock dividends                                   |   | (1,102              | )      | (1,102             | )      | (887                | )      | —             |   |
| Net Income (Loss) Applicable to Common  Shareholders        |   | (5,403              | )      | (922               | )      | (1,749              | )      | 26                 |   |
|                                                        |   |                |   |               |   |                |   |               |   |
| Basic and Diluted Earnings (Loss) Per  Common Share:        |   |                |   |               |   |                |   |               |   |
| Continuing operations, net of tax                           |   | $                   | 3.64   |               | $      | (0.55               | )      | $                  | (1.28  | ) | $ | 0.11 |   |
| Discontinued operations, net of tax                         |   | (8.74               | )      | (0.03              | )      | (0.34               | )      | —             |   |
| Net Earnings (Loss) Per Common Share                        |   | $                   | (5.10  | )                  | $      | (0.58               | )      | $                  | (1.62  | ) | $ | 0.11 |   |

 

The results of operations include the effects of the followingnon-recurring and unusual items:

 

2003:  In the fourth quarter of2003, loss from discontinued operations was unfavorably impacted by the writedown of net assets of discontinued operations to $3.0 million by a charge toloss from discontinued operations totaling $3.0 million offset by income fromdiscontinued operations of $0.4 million from the successful resolution of aclaim against a former subcontractor and through the collection of foreignaccounts receivable, which had previously been fully reserved.

 

At June 30, 2003, the Company adopted FAS 150 and preferred stockdividends were reclassified to interest expense.

 

2002:  In the fourth quarter of2002, income from continuing operations was favorably impacted by the change inestimate related to the Kaiser-Hill contract that increased the estimatedperformance fee by $34.8 million. Income from discontinued operations was favorably affected by thesuccessful resolution of a claim against a former subcontractor and through thecollection of foreign accounts receivable, which had previously been fullyreserved.

 

F-19

----

 

In the third quarter of 2002, income from continuing operations wasimpacted by the Company’s sale of its 10% interest in ICF Consulting resultingin a gain of $3.4 million, offset by the restructuring of the notes receivableand establishment of a reserve on the new note with ICF Consulting with a lossof $1.3 million, for a net positive impact of $2.1 million.

 

2001:  In the fourth quarter of2001, income from continuing operations was favorably impacted by a change inestimate related to the Kaiser Hill contract that increased the estimatedperformance fee by $15.8 million.

 

F-20

----

 

 

**KAISER-HILL COMPANY, LLCAND SUBSIDIARY**

 

Consolidated Financial Statements and Schedules

 

December 31,2003 and 2002

 

(With IndependentAuditors’ Report Thereon)

 

 

F-21

----

 

**IndependentAuditors’ Report**

 

The MembersKaiser-Hill Company, LLC:

 

Wehave audited the accompanying consolidated balance sheets of Kaiser-HillCompany, LLC (the Company) and subsidiary as of December 31, 2003 and2002, and the related consolidated statements of income, members’ equity, andcash flows for the years then ended. These consolidated financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits. The accompanying consolidated financial statements of the Company forthe year ended December 31, 2001 were audited by other auditors who haveceased operations. Those auditors expressed an unqualified opinion on thoseconsolidated financial statements in their report dated January 25, 2002.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluatingthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the consolidated financial positionof Kaiser-Hill Company, LLC and subsidiary as of December 31, 2003 and2002, and the results of their operations and their cash flows for the yearsthen ended, in conformity with accounting principles generally accepted in theUnited States of America.

 

 

**KPMG LLP**

 

 

January 30, 2004

 

F-22

----

 

**KAISER-HILL COMPANY, LLC**

**AND SUBSIDIARY**

 

ConsolidatedBalance Sheets

 

December 31,2003 and 2002

 

(Amountsin thousands of dollars)

 

 
|                                                                                       |   | **2003** |    | **2002** |    |
|--------------------------------------------------------------------------------------------|--------|----------|---------|----------|---------|
| **Assets**                                                                                 |   |     |    |     |    |
|                                                                                       |   |     |    |     |    |
| Current assets:                                                                            |   |     |    |     |    |
|                                                                                       |   |     |    |     |    |
| Cash and cash equivalents                                                                  |   | $        | 16,713  |     | 16,071  |   |
| Current portion of unbilled contract  receivables                                          |   | 99,956   |    | 98,458   |    |
| Due from employees                                                                         |   | —   |    | 51       |    |
| Prepaid expenses and other current assets                                                  |   | 479      |    | 450      |    |
| Total current assets                                                                       |   | 117,148  |    | 115,030  |    |
|                                                                                       |   |     |    |     |    |
| Unbilled contract receivables, net of  current portion                                     |   | 113,781  |    | 77,352   |    |
|                                                                                       |   |     |    |     |    |
| Prepaid expenses, long-term                                                                |   | 752      |    | 1,128    |    |
| Deferred financing costs, net of  accumulated amortization of  $357 and $271, respectively |   | 168      |    | 254      |    |
|                                                                                       |   | $        | 231,849 |     | 193,764 |   |
|                                                                                       |   |     |    |     |    |
| **Liabilities and Members’ Equity**                                                   |   |     |    |     |    |
|                                                                                       |   |     |    |     |    |
| Current liabilities:                                                                       |   |     |    |     |    |
|                                                                                       |   |     |    |     |    |
| Accounts payable and payables to  subcontractors                                           |   | $        | 81,198  |     | 74,916  |   |
| Current portion of employee incentive plan                                                 |   | 12,167   |    | 10,594   |    |
| Accrued vacation                                                                           |   | 10,550   |    | 11,485   |    |
| Accrued salaries and employee benefits                                                     |   | 6,807    |    | 9,724    |    |
| Payable to Members                                                                         |   | 648      |    | 867      |    |
| Total current liabilities                                                                  |   | 111,370  |    | 107,586  |    |
|                                                                                       |   |     |    |     |    |
| Employee incentive plan, net of current  portion                                           |   | 55,647   |    | 28,644   |    |
|                                                                                       |   | 167,017  |    | 136,230  |    |
| Members’ equity                                                                       |   | 64,832   |    | 57,534   |    |
|                                                                                       |   |     |    |     |    |
| Contingencies (note 7)                                                                     |   |     |    |     |    |
|                                                                                       |   | $        | 231,849 |     | 193,764 |   |

 

See accompanying notes to consolidated financial statements.

 

F-23

----

 

**KAISER-HILL COMPANY, LLC**

**AND SUBSIDIARY**

 

Consolidated Statements of Income

 

Years ended December 31, 2003, 2002, and 2001

 

(Amounts in thousands of dollars)

 
|                                           |   | **2003** |    | **2002** |    | **2001** |    |
|------------------------------------------------|--------|----------|---------|----------|---------|----------|---------|
| Gross revenue                                  |   | $        | 712,270 |     | 732,718 |     | 718,788 |   |
| Subcontractor costs and direct material  costs |   | (379,215 | )       | (367,355 | )       | (417,180 | )       |
|                                           |   |     |    |     |    |     |    |
| Service revenue                                |   | 333,055  |    | 365,363  |    | 301,608  |    |
| Direct cost of service and overhead            |   | (293,056 | )       | (291,986 | )       | (271,977 | )       |
|                                           |   |     |    |     |    |     |    |
| Operating income                               |   | 39,999   |    | 73,377   |    | 29,631   |    |
| Other income (expense):                        |   |     |    |     |    |     |    |
| Interest income                                |   | 113      |    | 232      |    | 569      |    |
| Interest expense                               |   | (114     | )       | (95      | )       | (116     | )       |
|                                           |   |     |    |     |    |     |    |
| Net income                                     |   | $        | 39,998  |     | 73,514  |     | 30,084  |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-24

----

 

**KAISER-HILL COMPANY, LLC**

**AND SUBSIDIARY**

 

Consolidated Statements of Members’ Equity

 

Years ended December 31, 2003, 2002, and 2001

 

(Amounts in thousands of dollars)

 
|                                         |   | **Kaiser KH  Holdings, Inc.** |   | **CH2M HILL  Constructors,  Inc.** |   | **Total** |   |
|----------------------------------------------|--------|-------------------------------|--------|------------------------------------|--------|-----------|--------|
| Members’ equity, December 31, 2000 |   | $                             | 518    |                               | 518    |      | 1,036  |   |
|                                         |   |                          |   |                               |   |      |   |
| Net income                                   |   | 15,042                        |   | 15,042                             |   | 30,084    |   |
| Distributions                                |   | (7,900                        | )      | (7,900                             | )      | (15,800   | )      |
|                                         |   |                          |   |                               |   |      |   |
| Members’ equity, December 31, 2001 |   | 7,660                         |   | 7,660                              |   | 15,320    |   |
|                                         |   |                          |   |                               |   |      |   |
| Net income                                   |   | 36,757                        |   | 36,757                             |   | 73,514    |   |
| Distributions                                |   | (15,650                       | )      | (15,650                            | )      | (31,300   | )      |
|                                         |   |                          |   |                               |   |      |   |
| Members’ equity, December 31, 2002 |   | 28,767                        |   | 28,767                             |   | 57,534    |   |
|                                         |   |                          |   |                               |   |      |   |
| Net income                                   |   | 19,999                        |   | 19,999                             |   | 39,998    |   |
| Distributions                                |   | (16,350                       | )      | (16,350                            | )      | (32,700   | )      |
|                                         |   |                          |   |                               |   |      |   |
| Members’ equity, December 31, 2003 |   | $                             | 32,416 |                               | 32,416 |      | 64,832 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-25

----

 

**KAISER-HILL COMPANY, LLC**

**AND SUBSIDIARY**

 

Consolidated Statements of Cash Flows

 

Years ended December 31, 2003, 2002, and 2001

 

(Amounts in thousands of dollars)

 
|                                                                               |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Cash flows from operating activities:                                              |   |     |   |     |   |     |   |
| Net income                                                                         |   | $        | 39,998 |     | 73,514 |     | 30,084 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |     |   |     |   |     |   |
| Amortization                                                                       |   | 86       |   | 88       |   | 88       |   |
| Changes in assets and liabilities:                                                 |   |     |   |     |   |     |   |
| Increase in contract receivables                                                   |   | (37,927  | )      | (44,331  | )      | (6,548   | )      |
| Decrease (increase) in due from employees                                          |   | 51       |   | 63       |   | (92      | )      |
| (Increase) decrease in prepaids and other  current assets                          |   | (29      | )      | 1,664    |   | (1,759   | )      |
| Decrease (increase) in long-term prepaids                                          |   | 376      |   | (1,128   | )      | —   |   |
| Increase (decrease) in accounts payable and  payables to subcontractors            |   | 6,282    |   | (19,792  | )      | (6,736   | )      |
| Increase in employee incentive plan                                                |   | 28,576   |   | 17,138   |   | 22,100   |   |
| (Decrease) increase in other accrued  expenses                                     |   | (3,852   | )      | 848      |   | (3,558   | )      |
| (Decrease) increase in payable to Members                                          |   | (219     | )      | (141     | )      | 492      |   |
|                                                                               |   |     |   |     |   |     |   |
| Net cash provided by operating activities                                          |   | 33,342   |   | 27,923   |   | 34,071   |   |
|                                                                               |   |     |   |     |   |     |   |
| Cash flows from financing activities:                                              |   |     |   |     |   |     |   |
| Distributions to Members                                                           |   | (32,700  | )      | (31,300  | )      | (15,800  | )      |
| Proceeds from credit facility                                                      |   | 71,300   |   | 37,700   |   | 29,900   |   |
| Payments on credit facility                                                        |   | (71,300  | )      | (37,700  | )      | (35,900  | )      |
|                                                                               |   |     |   |     |   |     |   |
| Net cash used in financing activities                                              |   | (32,700  | )      | (31,300  | )      | (21,800  | )      |
|                                                                               |   |     |   |     |   |     |   |
| Net increase (decrease) in cash and cash  equivalents                              |   | 642      |   | (3,377   | )      | 12,271   |   |
|                                                                               |   |     |   |     |   |     |   |
| Cash and cash equivalents, beginning of  year                                      |   | 16,071   |   | 19,448   |   | 7,177    |   |
|                                                                               |   |     |   |     |   |     |   |
| Cash and cash equivalents, end of year                                             |   | $        | 16,713 |     | 16,071 |     | 19,448 |   |
|                                                                               |   |     |   |     |   |     |   |
| Supplemental cash flow information:                                                |   |     |   |     |   |     |   |
| Cash paid for interest                                                             |   | $        | 26     |     | 7      |     | 28     |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-26

----

 

**KAISER-HILL COMPANY, LLC**

**AND SUBSIDIARY**

 

Notes to Consolidated Financial Statements

 

December 31, 2003 and 2002

 

**(1)**       Organization

 

Kaiser-HillCompany, LLC (the Company) was formed on October 24, 1994. The principalbusiness of the Company is to procure, execute, deliver, and perform under acontract with the Department of Energy (DOE) to manage the programs and operatethe DOE facilities at Rocky Flats Environmental Technology Site (RFETS) inGolden, Colorado. The mission of the RFETS is directed toward cleanup,deactivation, and preparation for decontamination and disposition of these DOEfacilities.

 

The Company is alimited liability company owned equally by Kaiser KH Holdings, Inc., a whollyowned subsidiary of Kaiser Group Holdings, Inc. (formerly known as Kaiser GroupInternational, Inc.) (Kaiser), and CH2M HILL Constructors, Inc., an indirectwholly owned subsidiary of CH2M HILL Companies, Ltd. (CH2M HILL) (collectivelythe Members). Net profits and/or losses and distributions thereof are allocatedequally to the Members.

 

At December 31, 2003, the Company employed approximately 1,102hourly workers and approximately 376 salaried workers. Approximately 80% of thehourly employees are represented by United Steel Workers of America under acollective bargaining agreement which expires on January 15, 2007.

 

On January 24, 2000, the Company and the DOE entered into a newcontract (the Contract) effective February 1, 2000. The Contract isin effect until the physical completion of the Rocky Flats Closure Projectincluding closure, disposal of nuclear material, demolition of facilities,environmental remediation, waste disposal, infrastructure, and general siteoperations. Under the Contract, the Company has the opportunity to earn anadditional fee if the total costs incurred are below the Contract target cost orthe completion of the site closure is before March 31, 2007. In addition,the Company can lose a portion of its fee if the costs exceed an amount equalto $200 million above the Contract target cost or the site closure is afterMarch 31, 2007. The modified maximum and minimum fee available to beearned by the Company through the date of closure is $461.2 million and $151million, respectively.

 

**(2)**       Significant Accounting Policies

 

***(a)***                      Principles of Consolidation

 

The consolidatedfinancial statements include the Company and its wholly owned subsidiary,Kaiser-Hill Funding Company, LLC. All intercompany accounts and transactionshave been eliminated in the consolidated financial statements.

 

***(b)***                      Revenue Recognition

 

Under theContract, revenue is recognized using the percentage-of-completion methodwhereby revenue is accrued in an amount equal to cost plus management’s bestestimate of incentive fees. Incentive fees are estimated based on projectedtotal Contract costs and site closure date. The Company continually monitorsits progress toward the completion dates and its estimated costs at completionand will modify its estimates of fees to be earned as needed. Changes in theseestimates could have a significant effect on future earnings of the Company. During2003, management revised its estimate of projected cost at completion basedupon the Company’s current progress under the Contract. The change in estimateresulted in approximately $25,200,000 of additional incentive fees to berecognized over the life of the Contract. The Company recognized approximately$17,100,000 in additional revenue during the year ended December 31, 2003when compared to the previous year ended December 31, 2002, due to thechange in estimate.

 

F-27

----

 

***(c)***                       Statements of Cash Flows

 

For purposes ofthe consolidated statements of cash flows, the Company considers cash inchecking and short-term investments with original maturities of three months orless to be cash and cash equivalents.

 

The Companymaintains its cash accounts primarily with banks located in Colorado, New York,and Washington, D.C. Cash balances are insured by the FDIC up to $100,000 perbank and cash equivalents are not insured by the FDIC. As of December 31,2003, the majority of the cash balance was made up of cash equivalents.

 

***(d)***                      Income Taxes

 

No provision forthe payment of income taxes has been made in the accompanying consolidatedfinancial statements related to the activities of the Company since the Memberseach report their share of the Company’s taxable income in their respectiveindividual income tax return.

 

***(e)***                       Use of Estimates

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of financialstatements and the reported amounts of revenue and expenses during thereporting period. Actual results could differ from those estimates.

 

As discussed innote 2(b), revenue under the Contract is recognized using thepercentage-of-completion method whereby revenue is accrued in an amount equalto cost plus management’s best estimate of incentive fees. Incentive fees areestimated based on projected total Contract costs and site closure date.Changes in these estimates could have a significant effect on the futureearnings of the Company.

 

**(3)**                     Related Party Transactions

 

In 2003 and 2002,the Members were subcontracted by the Company to perform certain tasks underthe Contract. The “Payable to Members” in the accompanying consolidated balancesheets as of December 31, 2003 and 2002 consists of $250,000 and $250,000,respectively, to Kaiser and $398,000 and $617,000, respectively, to CH2M HILLfor these subcontracted tasks. These payables are noninterest bearing.

 

During 2003, CH2MHILL began providing information technology services for the Company atnegotiated rates. Costs incurred related to work performed by CH2M HILL, themajority of which are reimbursable and billed under the Contract and relate toinformation technology services provided, were approximately $10,652,000 in2003, $473,000 in 2002, and $851,000 in 2001.

 

In addition, theCompany performed approximately $4,892,000 and $2,145,000 of services on behalfof CH2M HILL during 2003 and 2002, respectively.

 

F-28

----

 

**(4)**                     Contract Receivables

 

Contractreceivables as of December 31, 2003 and 2002 primarily represent unbilledreceivables due under the Contract. Unbilled receivables result from revenueand estimated fees that have been earned by the Company but not billed to theDOE as of the end of the period. Unbilled receivables can be invoiced atcontractually defined intervals and milestones. Management anticipates that thecurrent portion of unbilled receivables will be billed and collected in lessthan one year. Current unbilled receivables primarily represent allowablecosts, including subcontractor costs, that have not been submitted to the DOEfor payment. These costs cannot be invoiced to the DOE until payment has beenmade by the Company to the vendor. In addition, under the terms of theContract, the Company receives a cash payment of 50% of the incentive fee dueon a quarterly basis. These payments increased slightly during the last year asDOE has recognized accelerated work progress. The remainder of the incentivefee, based on projected costs at completion and closure date, is to be paid bythe DOE upon the completion of the Contract, currently estimated to beSeptember 30, 2006. As such, these amounts are classified as noncurrent inthe accompanying consolidated balance sheets. As discussed above, any modificationsor changes in the cost estimates or the site closure date will impact theseoutstanding amounts and could increase or decrease such amounts.

 

As ofDecember 31, 2003 and 2002, the Company has $113.8 million and $77.4million, respectively, of long-term unbilled receivables that representincentive fee under the Contract. These can be billed at the completion of theContract, currently estimated to be September 30, 2006. In addition, theCompany has current unbilled receivables of $100.0 million and $98.5 million asof December 31, 2003 and 2002, respectively. This is comprised of $7.9million and $7.1 million, respectively, of incentive fees and $92.1 million and$91.4 million, respectively, of direct reimbursable costs under the Contract.All of these amounts have been billed subsequent to year-end.

 

The Company’sContract receivables result primarily from its long-term Contract with the DOE.As a consequence, management believes that credit risk is minimal.

 

**(5)**                     Employee Incentive Plan

 

In connection withthe closure Contract with the DOE, the Company implemented an employeeincentive plan. There are two components to the plan. The first componentrepresents a cash bonus, which is earned and paid annually. The secondcomponent represents the issuance of performance units. These units areallocated to employees on an annual basis. The value of these units ultimatelydepends on the actual cost achieved and the closure date and range from $0 to$1 per unit. Employees remain eligible for these units as long as they areemployed by the Company or left in good standing, as defined. Payments made forperformance units will be paid in cash at the end of the Contract.

 

As ofDecember 31, 2003, the Company has issued approximately 51,927,000performance units and the estimated value to be paid is accrued as employerincentive plan liability. The payments of the unit bonus will take place uponclosure of the Contract, and therefore, the associated accrual is classified asa long-term employee incentive plan liability in the accompanying consolidatedbalance sheets.

 

F-29

----

 

Additionally, theCompany has accrued $3.7 million for an enhanced schedule incentivepayable to the hourly employees represented by United Steel Workers of Americaunder the collective bargaining agreement. This payment will also take place upon closure of the Contract and isalso classified as a long-term liability in the accompanying consolidatedbalance sheets.

 

**(6)**                     Business Loan and Security Agreement

 

The Companycurrently has a Business Loan and Security Agreement (the Agreement) witha bank. The term of the Agreement is through December 31, 2005. TheCompany, Kaiser, and CH2M HILL granted a first lien security interest to thebank in all of the ownership and equity interest of the Company. As ofDecember 31, 2003 and 2002, the Company had no amounts outstanding underthe Agreement.

 

Under theAgreement, the Company has available temporary financing for the payment of theCompany’s costs incurred under the Contract. This financing is utilizedthroughout the year for periods of less than one month as, under the terms ofthe Contract, the DOE must pay the Company’s invoices within three businessdays of receipt. The funding level under the Agreement cannot exceed a maximumborrowing base calculated on the lesser of eligible billed and unbilledgovernment accounts receivable, as defined, or $35,000,000. Under the terms ofthe Agreement, interest on the advances is calculated either under a rate basedupon LIBOR or a rate based upon the higher of the Federal Funds Rate or thePrime Rate.

 

In connection withthe Agreement, the Company incurred $525,000 in loan origination fees, whichare capitalized as deferred financing costs and are being amortized to interestexpense over the life of the Agreement.

 

The Agreement alsocontains various financial covenants, including tangible net worth, fixedcharge ratio, and minimum cash balances requirements, among other restrictions.The Company was in compliance with all restrictive covenants atDecember 31, 2003.

 

**(7)**                     Contingencies

 

The Company’sreimbursable costs are subject to audit in the ordinary course of business byvarious U.S. government agencies. Management is not presently aware of anysignificant costs, which have been, or may be, disallowed by any of theseagencies.

 

**(8)**                     Employee Benefit Plans

 

In accordance withthe Contract, the Company participates in several multiemployer benefit planscovering substantially all employees who meet length of service requirements.These plans include a defined benefit pension plan and two defined contributionplans, the latter of which provide for Company matching contributions. TheCompany contribution amounts for the defined contribution plans wereapproximately $1,227,000 and $1,916,000 for 2003 and 2002, respectively. Noamounts were contributed to the defined pension benefit plan during 2003 or2002 because current levels of funding did not require contributions to bemade.

 

F-30

----

 

The Companyadministers these benefit plans with benefits equivalent to the RFETScontractor benefit plans maintained by the contractor that preceded the Companyat RFETS. Under the Contract, the Company recognizes the cost of benefit plans whenpaid, and such costs are reimbursed by the DOE. Any excess pension plan assetsor unfunded pension plan liability which may currently exist or is remaining atthe end of the DOE Contract accrues to or is the responsibility of the DOE.

 

F-31

----

 

### **Reportof Independent Accountants on**

### **Financial Statement Schedule**

 

 

 

To Board of Directors and

     Shareholders of KaiserGroup Holdings, Inc.

 

Our auditsof the consolidated financial statements referred to in our report datedMarch 24, 2004 appearing in the 2003 Annual Report to Shareholders ofKaiser Group Holdings, Inc. (which report and consolidated financial statementsare incorporated by reference in this Annual Report on Form 10-K) also includedan audit of the financial statement schedule listed in Item 15(a)(2) ofthis Form 10-K.  In our opinion, thisfinancial statement schedule presents fairly, in all material respects,the information set forth therein when read in conjunction with the relatedconsolidated financial statements.

 

PricewaterhouseCoopersLLP

 

March 24, 2004

 

S-1

----

 

**SCHEDULE II****– VALUATIONAND QUALIFYING ACCOUNTS**

 

**KAISERGROUP HOLDINGS, INC. AND SUBSIDIARIES**

**(inthousands)**

 
| **Column A**                      |   | **Column B**                         |   | **Column C**                                  |   | **Column D** |   | **Column E**   |   | **Column F**                       |   |
|-----------------------------------|--------|--------------------------------------|--------|-----------------------------------------------|--------|--------------|--------|----------------|--------|------------------------------------|--------|
| **Description**                   |   | **Balance at  Beginning of  Period** |   | **Additions  Charged to Costs  and Expenses** |   | **Other**    |   | **Deductions** |   | **Balance at  the End of  Period** |   |
|                              |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Year Ended December 31, 2003 |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Deducted from asset account:      |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Allowance for doubtful accounts   |   | $                                    | 548    |                                          | $      | —       |   | $              | — |                               | $      | — |   | $ | 548 |   |
|                              |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Discontinued operations           |   | 17,253                               |   | 3,000                                         |   | 3,342        | (1)    | —         |   | $                                  | 23,595 |   |
|                              |   |                                 |   |                                          |   |         |   |           |   |                               |   |
|                              |   | $                                    | 17,801 |                                          | $      | 3,000        |   | $              | 3,342  |                               | $      | — |   | $ | 24,143 |   |
|                              |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Year Ended December 31, 2002 |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Deducted from asset account:      |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Allowance for doubtful accounts   |   | $                                    | — |                                          | $      | —       |   | $              | 548    | (1)                                | $      | — |   | $ | 548 |   |
|                              |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Discontinued operations           |   | 20,105                               |   | —                                        |   | —       |   | (2,852         | )      | $                                  | 17,253 |   |
|                              |   |                                 |   |                                          |   |         |   |           |   |                               |   |
|                              |   | $                                    | 20,105 |                                          | $      | —       |   | $              | 548    |                               | $      | (2,852 | ) | $ | 17,801 |   |
|                              |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Year Ended December 31, 2001 |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Deducted from asset account:      |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Allowance for doubtful accounts   |   | $                                    | 1,419  |                                          | $      | —       |   | $              | (181   | )                                  | $      | (1,238 | ) | $ | — |   |
|                              |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Discontinued operations           |   | 3,081                                |   | 16,409                                        |   | 615          | (1)    | —         |   | 20,105                             |   |
|                              |   |                                 |   |                                          |   |         |   |           |   |                               |   |
|                              |   | $                                    | 4,500  |                                          | $      | 16,409       |   | $              | 434    |                               | $      | (1,238 | ) | $ | 20,105 |   |
|                                   |        |                                      |        |                                               |        |              |        |                |        |                                    |        |  |  |  |  |  |  |  |

 

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(1)  Reflects reclassifiedadditions to reserves.

 

S-2

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